How the SECURE Act Affects Your IRA and 401(k)

Congress recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act which went into effect on January 1, 2020. The goal of the SECURE Act is to increase access to tax-advantaged retirement accounts and help ensure that Americans do not outlive their assets. This legislation was passed with bi-partisan support and includes policy changes that will impact Defined Contribution Plans (i.e. 401k), Defined Benefit Plans (i.e. pensions), and 529 College Savings Plans.

While there are many nuances to the law, some of the relevant provisions include the following:

  • Required Minimum Distributions (RMD) - The age at which the government requires an individual to withdraw from their Individual Retirement Accounts (IRA) and 401k is being pushed from 70 ½ to 72. While the IRS is expected to provide further guidance, those who reach age 70 ½ in 2020 are eligible to delay their RMD. Those who turned 70 ½ in 2019 or before are still required to continue taking their RMDs according to the previous rules.
  • Contributions to traditional IRAs – While previous laws stated that a person could not contribute to an IRA after reaching age 70 ½, the SECURE act removed this age limit for anyone with their own or spousal earned income.
  • Inherited IRAs – Non-spousal beneficiaries of inherited IRAs will have to take distributions on those accounts over 10 years instead of their lifetimes. This effectively removes the benefits of stretch IRAs. Spousal beneficiaries may still treat an inherited IRA as their own and take distributions based on their lifetime.

Given these changes, now may be a good time to review beneficiary designations on your retirement accounts to ensure they are passed along in the most efficient way possible. If you are inclined to give to charity, these new laws may also make it more beneficial to use your retirement accounts to fund donations.

Additional provisions to the SECURE Act include: allowing up to $10,000 to be withdrawn from 529 Plans to help graduates pay down student debt, penalty-free withdrawals of up to $5,000 from retirement accounts to pay for costs related to the birth or adoption of a child, and expanding access for long-term part-time employees to participate in their employer sponsored retirement plans.

The SECURE Act is designed to increase retirement savings for millions of Americans, but some rules may limit savings and increase tax burdens on inheritors of IRAs. If you have questions or want more information about how the SECURE Act affects your plan, please call your Mesirow wealth advisor.

 

Sources and Footnotes:
1 https://www.barrons.com/articles/secure-act-we-answered-the-most-commonly-asked-questions-about-the-retirement-bill-51576751402
2 https://www.barrons.com/articles/the-secure-act-what-it-will-mean-for-your-401-k-and-ira-51576666801?mod=djem_b_reviewpreview_20191218
3 https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf