The SECURE Act and You

As part of a larger government spending package signed into law on December 20, 2019, Congress included provisions from the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act includes many common-sense, long-overdue reforms that could make saving for retirement easier and more accessible for many Americans. It reflects policy changes to defined contribution plans (such as 401(k)s), defined benefit pension plans, individual retirement accounts (IRAs), and 529 college savings accounts. Most provisions go into effect January 1, 2020.

KEY TAKEAWAYS OF THE SECURE ACT

Required minimum distributions (RMDs) begin at age 72

  • Americans will no longer be required to withdraw assets from IRAs and 401(k)s at age 70½.
  • RMDs now begin at age 72 for individuals who turn 70½ in the calendar year 2020.
  • If you turned age 70½ in 2019 and have already begun taking your RMDs, you should generally continue to take your RMDs. The IRS may provide further guidance on this point.

You can make IRA contributions beyond age 70½

  • As Americans live longer, an increasing number are continuing to work past their traditional retirement age.
  • Under the act, you can continue to contribute to your traditional IRA past age 70½ as long as you are still working.

Long-term, part-time workers will be able to join their company’s 401(k) plan

  • Up until now, if you worked less than 1,000 hours per year, you were generally ineligible to participate in your company’s 401(k) plan.
  • Except in the case of collectively bargained plans, the law now requires employers maintaining a 401(k) plan to offer one to any employee who worked more than 1,000 hours in one year, or 500 hours over 3 consecutive years.

Inherited IRA distributions generally must now be taken within 10 years

  • Previously, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy.
  • 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.
  • Exceptions to the 10-year rule include assets left to a surviving spouse, minor child, disabled or chronically ill beneficiary, and beneficiaries less than 10 years younger than the original owner

Small-business owners can receive a tax credit for starting a retirement plan, up to $5,000

  • The new law provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work (minimum credit of $500 and maximum credit of $5,000).
  • This credit applies to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019 and to SEP, SIMPLE, 401(k), & profit sharing plans.
  • If the retirement plan includes automatic enrollment, an additional credit of up to $500 is now available.

Small-business owners will find it easier to join together to offer defined contribution retirement plans

  • The new law allows completely unrelated employers to participate in an MEP and eliminates the IRS’s “one bad apple” rule, which stipulates that all employers participating in an MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP.
  • Open MEPs can help deliver low-cost, high-quality retirement plans for millions of small business workers.

You can withdraw up to $5,000 per parent penalty-free from your retirement plan upon the birth or adoption of a child

  • The new law permits an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA.
  • The 10% early withdrawal penalty will not apply to these withdrawals, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA.

529 funds can now be used to pay down student loan debt, up to $10,000

  • If families have money left in their college savings plans after their student graduates they can use a 529 savings account to pay up to $10,000 in student debt over the course of the student’s lifetime.
  • Under the new law, a 529 plan may also be used to pay for certain apprenticeship programs.

OTHER SECURE ACT CHANGES TO NOTE

  • Encourages retirement saving by raising the cap for auto enrollment contributions in employer-sponsored retirement plans from 10% of pay to 15%.
  • Allows “lifetime income investment” to be distributed from your workplace retirement plan. The retirement income options would be portable.
  • Increases transparency into retirement income with “lifetime income disclosure statements.” These statements would show how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity.

Information provided by Fidelity Viewpoints.