The SECURE Act: how it affects retirement plans

The SECURE ACT, which passed the House and Senate, was signed into law by President Trump on December 20, 2019. It became effective January 1, 2020 — and will have impacts on business retirement plans as well as IRA and Roth contributions and distributions. College Savings plans (529) will also have additional provisions added.

“Stretch IRA” no longer a viable strategy

One big part of this legislation is the impact it will have on those who planned to “stretch” payments to beneficiaries. The “stretch IRA” basically allowed a non-spouse beneficiary to take distributions from an inherited IRA or Roth over their own lifetime. This would allow, say, a 30 year heir of a grandparent’s IRA to take more than 50 years of tax deferred income (in the case of an IRA) or tax free income (in the case of a Roth). Those who have already initiated this strategy will be allowed to continue doing so.

However, for many of those that inherit an IRA on or after 01/01/2020, it will mean withdrawing those assets within 10 years rather than basing on their own life expectancy. While 10 years may seem like a long time, the change will require some folks to do additional estate planning. Parents or grandparents who had planned more “control from the grave” for spendthrift beneficiaries may want to consider other strategies.

There are exceptions to this that include a surviving spouse, heirs within 10 years of the age of the original owner, disability or chronically ill beneficiaries, and minor children. Once the minor reaches age of majority (or age 26 if still in school) the 10 year period will start.

Retirement account distributions after the SECURE Act

The Required Minimum Distribution (RMD) has been changed from 70 ½ to 72. If you turned 70 ½ after 12/31/2019, this applies to you. If you were 70 ½ prior to that you will need to comply with the previous requirement.

Penalty-free withdrawal exceptions

The SECURE Act also added penalty-free withdrawal exceptions. Childbirth and adoption costs up to $5,000 may be taken from 401k, IRAs, and other retirement accounts prior to age 59 ½ without a 10% penalty for early withdrawal. Remember: penalty-free does not mean tax-free. If money is taken from a tax deferred account (vs. tax-free) ordinary income tax will likely apply.

Educational stipends

Graduate, post-doctoral and research students will now be allowed to use money received as stipends to be considered as income for the purpose of IRA and Roth contribution calculations. Often, these participants are in a low tax bracket and are young. The long-term benefit of a Roth could be very significant.

The SECURE Act may allow borrowing from retirement for a home purchase

The ability to borrow from a 401k as much as 50% of the account value not exceeding $50,000 for a period of five years or longer is allowed if used to buy a home. There’s a few moving parts to this so use caution and be fully aware of what your commitment is.

529 education plans

529 Plans (Education Savings plans) will be impacted, and this change is important. The SECURE Act expands the definition of “educational expenses” to include student loan payment and costs of apprenticeship programs, up to $10,000. Prior to the new legislation, money taken from a 529 plan to pay student debt was not considered a qualified expense.

Employer-provided retirement plans

Provisions of the secure act will also impact employer provided retirement plans. If you have any fiduciary role in these plans, be sure to become familiar with these changes.

How will the SECURE Act affect your retirement?

Due to the large number of changes in 2020, I recommend, at a minimum, to annually review your beneficiary designations and dive more specifically into how the provisions of the SECURE Act may affect your retirement outlook.

For more details of the SECURE Act, or for one-on-one advice, feel free to contact me!

February 2020