The New ”SECURE Act” Changes Rules on Retirement Savings

In December, 2019, the President signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act which took effect on January 1, 2020.  This law has made significant changes in some of the retirement account rules which previously existed.

Some of the changes include delaying the date on which a person must begin taking Required Minimum Distributions (RMD) from their IRA or other retirement accounts from age 70 1/2 to age 72.  The law also repeals the maximum age for traditional IRA contributions, which was currently 70 ½.  You can continue to contribute to an IRA after that age so long as you are still working and earning income. Some long-term part-time workers will now be able to join their employer’s 401k plan.

One of the biggest changes is that inherited IRA distributions will have to be taken (and will be taxed) within 10 years from the date of the IRA owner’s death, unless the beneficiary falls into an excepted beneficiary category.  This, in effect, has done way with the “stretch IRA” in many situations. Under prior law, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy. Now, for traditional IRAs inherited from original owners who pass away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.

The exceptions to this 10-year rule are when the beneficiary is:  (1) a surviving spouse, (2) a minor child, (3) a disabled beneficiary, (4) a “chronically ill” beneficiary, and (5) beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.  If the beneficiary is a trust, then whether or not the 10-year rule applies depends upon the type of trust and the types of beneficiaries.

The new law now also allows withdrawals of up to $5,000 per parent penalty-free from your retirement plan upon the birth or adoption of a child, and educational accounts, so-called “529 funds” can now be used to pay down student loan debt, up to $10,000.

If you have an IRA that you planned to leave to beneficiaries based upon prior “stretch IRA” rules, you should consult with your tax advisor or estate planning attorney, as the changes brought about by the SECURE Act may require you to reevaluate your retirement and estate planning strategies.