What Is it & How Does It Impact Your Retirement?

The rules for retirement were rewritten recently in the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act. It was passed at the end of 2019 and went into effect on January 1, 2020. The Act changes many things related to retirement accounts. Here we highlight the most important ones that are likely to impact your retirement plan.

What Is the SECURE Act?

The SECURE Act is a wide-ranging piece of legislation. It includes a number of retirement reforms designed to help people achieve their retirement goals, while they are both saving for retirement and in retirement. Some provisions in the SECURE Act that impact retirement include:

SECURE Act Rules for 2021

The vast majority of the provisions of the SECURE Act went into effect at the beginning of 2020. But one rule took effect at the beginning of 2021.

Part-time workers who meet certain criteria may now participate in their company’s 401(k) plan. In the past, those working less than 1,000 hours per year were ineligible. The new rules offer some alternative service calculations that benefit many part-time workers.

Impact on RMDs

One of the biggest changes from the SECURE Act was the increase in the starting age for RMDs from 70½ to age 72. This change went into effect for anyone who had not reached age 70½ as of December 31, 2019. For them, their RMDs continued as per their prior schedule.

But the SECURE Act drastically changed the rules for distributions from inherited IRAs. It eliminates RMDs and the ability to stretch the distributions from these accounts over a number of years for most non-spousal beneficiaries.

Instead of being able to take RMDs over their life expectancies, they are now required to take a full withdrawal from the IRA account within 10 years of inheriting it. In cases where the beneficiary is an adult in their peak earning years, this requirement increases their taxable income and could cause a large portion of the inherited IRA balance to be eroded due to taxes.

The 10-year rule also applies to inherited Roth IRAs. But the distributions will not be taxed as long as the original account holder had met the five-year requirement on their Roth IRA account.

But the rules differ for the spouse, children who have not reached the age of majority, disabled or chronically ill persons, and persons not more than ten years younger than the original account owner. Those beneficiaries can continue to take RMDs from the inherited IRA. This effectively stretches out the money in these accounts.

These new rules apply to IRAs inherited on or after January 1, 2020.

Impact on IRAs

Prior to the SECURE Act, the maximum age to contribute to a traditional IRA account was 70½. The new rules allow contributions to an IRA account regardless of your age as long as you have earned income from employment or self-employment.

But RMDs still need to be taken from these accounts if you have reached age 72.

The earliest age to commence qualified charitable distributions (QCDs) oddly enough remains at 70½ and was not raised to 72 along with the increase in the starting age of RMDs.

QCDs take a distribution from an IRA account and divert that distribution to a qualified charitable organization. The amount of the QCD is not taxed. For those who don’t need some or all of their RMD amount and who are charitably inclined, QCDs can be a tax-efficient way to take RMDs.

Keep in mind that any pre-tax IRA contributions made after age 70½ reduce the amount of future QCDs that can be made on a permanent basis.

Impact on Student Debt

One provision of the SECURE Act allows money in a 529 college savings plan to be used to repay student loan debt.

A maximum of $10,000 from a 529 account can be used to repay the student loan debt of the account beneficiary. Additionally, an additional $10,000 from the account can be used to repay the student loan debt for any of the beneficiary’s siblings. This includes both step-siblings and natural siblings.

These withdrawals are now qualified 529 plan withdrawals and not subject to taxes. However any student loan interest paid with these distributions will not qualify for a student loan interest deduction.

In situations where there is extra money in a 529 plan, this rule change helps eliminate some or all of the student loan debt of a child. And this allows them to potentially divert their student loan payment money into retirement savings in their employer’s 401(k) or similar workplace retirement plan.

Other Key SECURE Act Rules

There are some other key aspects of the SECURE Act to be aware of.

The Birth or Adoption of a Child

The SECURE Act now permits 401(k) account holders to withdraw up to $5,000 to help defray the costs associated with the birth or adoption of a child. This withdrawal can be made penalty-free, but any taxes that would be due still applied.

Tax Credits for Employers

The SECURE Act created a tax credit for employers for the startup costs of a retirement plan. The tax credit is up to $5,000 per year for eligible expenses. The restrictions involved route the credits toward small businesses. This credit applies to the startup costs of a 401(k), a SEP IRA, a SIMPLE IRA, and some other qualified retirement plans. The maximum tax credit is $15,000.

There is also a tax credit for employers who add an auto-enrollment feature in their organization’s retirement plan. The maximum credit is $500 per year up to a maximum of $1,500 total.

A company could receive both tax credits if they meet the requirements.

Summary

The SECURE Act instituted a number of significant changes designed to aid those saving for retirement. It also helps those in retirement make their retirement savings last longer. The long-term impact of the provisions of the SECURE Act remains to be seen.

Those saving for retirement and those in retirement need to understand the changes brought about by this legislation to ensure that they use these new provisions to their best advantage. It makes sense to look at these changes in light of your personal situation. It could be worth consulting with a financial advisor to help in this effort as well.