The SECURE Act of 2019 is supposed to help Americans save more for their retirement.  It encourages small employers to help by giving them credits for the start-up costs associated with setting up pension and retirement plans.  There are lots of changes in the laws associated with benefits and retirements. 

SECURE stands for “The Setting Every Community Up for Retirement Enhancement Act.”  It was signed by trump on December 20, 2019 and became effective on January 1, 2020.  The Act is intended to help employees provide more retirement plans for their employees.  The Act makes it so that part-time employees can participate in the plans.  Below are some of the major changes that will make a difference in your life.

1. Required Minimum Distributions (RMDs) Not Required Until Age 72

You will now have until 72 to start taking RMDs.  You can leave your money growing in the retirement plan longer.  This affects traditional IRAs and employer tax-deferred accounts such as 401(k)s, 403(b)s, and 457s.  People who were 70½ before January 1, 2020, still have to keep taking their RMDs, but if you were not 70½ before January 1st, you have until age 72 before the RMDs start.  Remember you have to take your RMDs before April 1, 2020 if you turned 70½ in 2019.  That means if you were born before July 1, 1949, you had better get your RMDs paid or face the draconian penalties the IRS has waiting for you. If you are born after that date, don’t sweat RMDs until you are age 72.

2. You Can Contribute to a Traditional IRA After Age 70½

If you were 70½ during or before 2019, then you can’t make a contribution to your 2019 traditional IRA.  However, after 2019, you can make contributions to your traditional IRA, even if you are past 70½.  Of course, contributions can only be made if you have earned income in the year you want to contribute.  Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income. You still may not make 2019 (prior year) traditional IRA contributions if you are over 70½.

3.  Inherited IRAs and Retirement Accounts

Under the old law, a person could “stretch” an inherited IRA account over his or her lifetime.  Required Minimum Distributions (RMDs) had to be taken out each year, but the RMDs were calculated on the life of the beneficiary who was stretching the account.  Under the SECURE Act, a beneficiary of an IRS, 401(k) account, or any type of defined contribution account has to take the money out of the account they inherited within 10 years of the death of the original account owner.  That means the money can’t continue to grow in the tax preferred environment of the IRA or retirement account, and the beneficiary has to take the money out and pay the tax on it.  In bigger accounts this could be a disaster, because the money comes out of the account as ordinary income and just stacks on your other income for that year.  Maybe you will want to take the money out in smaller amounts over the 10-year period or in a year when your other income is lower.  You do not have to take RMDs during the 10-year period.

The spouse, and individuals not more than 10 years younger than the owner of the IRA or retirement plan, can still stretch the account over their lifetime, basically using the old stretch/ inherited rules.  Also, minor children and disabled individuals who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.

The new stretch IRA rules only apply to people who inherit from a person dying after December 31, 2019.  Anyone who died before 2020 and left their IRA or retirement account to someone will be governed under the old rules.

4. 529 Plans

The rules governing 529 plans (student college savings accounts) have been loosened.  Thus, for example, a parent that has money left in a 529 plan could now use the money to pay down their child’s student loans. 

5. Birth/Adoption Expenses

SECURE lets parents who have a baby or adopt after 2019 to withdraw up to $5,000 from their IRA to cover expenses associated with the birth or adoption.  Husband and wife can each withdraw up to $5,000 from their account, so a couple could actually access up to $10,000 to cover the expenses.  Note that each spouse has to have a separate account to draw from. 

The SECURE Act makes it easier for employees and employers to have retirement accounts, but it is a substantial setback when it comes to passing wealth after an individual dies. 

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