The SECURE Act Has Passed. What Does it Mean for Your Retirement?

In June 2019, I wrote about the  SECURE  Act (Setting Every Community Up for Retirement Enhancement) that the House of of Representatives passed  .  The Senate approved the bill on December 19, 2019, and it was signed into law on December 20 by the President.

This ambitious bill offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act will adjust the age caps on traditional IRAs, increase access to tax-advantaged retirement savings accounts and provide more part-time workers with the opportunity to participate in an employer-sponsored 401(k) plan, . Below are the most prominent changes of this new act and how they may affect your own retirement.

Traditional IRA Contributions can be made beyond age 70½  

Prior to 2020, individuals were no longer eligible to contribute to their traditional IRA once they reached age 70½ even if they were still working.  Starting in 2020, The SECURE act has eliminated the previous age cap, allowing people to continue contributing to their IRA for as long as they continue working.  This change is great news for seniors who continue to work well beyond the traditional retirement age and still wish to save money in their IRA.

Lifetime "Stretch" Provision for Inherited IRA's eliminated

Under the new act, beneficiaries who have inherited a retirement account will be required to withdraw the amount in its entirety within 10 years of receiving the account. Prior to 2020, inheritors were given the opportunity to withdraw the amount over their life expectancy.   This was a great estate planning tool as people who had a substantial amounts within an IRA could leave it to their young heirs.  The young heir in turn, upon receiving the Inherited IRA could slowly withdraw the balance based on their life time.  Thereby allowing the IRA further opportunity to grow.  Starting in 2020, the inherited IRA must be withdrawn completely within 10 years of receiving the IRA.  This change can significantly impact the tax obligation of the recipient depending on the size of the Inherited IRA.   However, there are certain groups of people who are exempt from this rule:

• Spouses of the deceased
• Beneficiaries who are disabled or chronically ill
• Certain minors (those children of the original retirement account owner). But only until they reach the age of majority. 
• Individuals who are not more than 10 years younger than the decedent

Required Minimum Distribution Age For Retirement Accounts Increased

Prior to 2020, when someone reached age 70½, they were required to begin withdrawing money from their retirement accounts.   Starting in 2020, the minimum required minimum distribution age is 72.  Therefore, if you are turning 70½ in 2020, you can now wait until the year you turn 72 before taking your first retirement plan distribution.  The advantage to this change is that it will allow your retirement accounts to grow for an additional year and a half.  The new law does not impact the age when you can voluntarily begin withdrawing from your retirement account.  That age remains 59½.

Roth Conversion Are More Advantageous

The elimination of the "Stretch" Provision and the increase in the required minimum distribution age has made Roth Conversions more advantageous.  People who have large amounts in an IRA that they wish to give some or all to an heir, can slowly convert that IRA into a Roth IRA.  You can continue this strategy for an additional 1½ years because the required minimum distribution age has been increased from 70½ to 72.  The benefit to the Roth IRA holder is that there is no required distribution age limit.  They can withdraw money as they wish or leave the money in the Roth IRA for their heirs.    Amounts converted from a traditional IRA into a Roth IRA is taxable in the year converted.  However, any distribution is tax-free.  Heirs who receive the Roth IRA, are not limited to the new 10 Year distribution rule and can keep the money in the Roth IRA as long as they wish.  Plus, any money withdrawn is also tax-free.

Penalty-Free Withdrawals For Qualified Births & Adoptions

Section 113 of the SECURE act introduces a new exception for those who seek early distributions. You may now withdraw from your retirement accounts penalty-free for "Qualified Births or Adoptions." New parents, whether through birth or adoption, are allowed to withdraw up to $5,000 from their individual retirement accounts. In order to make a penalty-free withdrawal, new parents must do so within one year of the birth or adoption.¹

Notably, the exception applies on an individual basis. Meaning, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.

401(k) Eligibility Requirement For Part-Time Workers Reduced

Before the SECURE Act, employees were required to work 1,000+ hours per year for an employer in order to be eligible to participate in a 401(k). Recognizing the importance for all workers to participate in employer-provided retirement plans, additional provisions were included int he SECURE Act to help employers encourage their employees to increase contributions and to let (some) part-time employees participate when they were previously ineligible to do so.

In order to be eligible, part-time employees will have to have worked 500+ hours per year for an employer (which averages out to 9.6 hours a week) for the past three consecutive years. In addition, the employee must be 21 years of age or older by the end of those three years.¹

These changes for part-time workers apply to plan years beginning in 2021, but the SECURE Act does not require an employer to start ‘counting’ 500-hour years for the purposes of this new rule until 2021. That means that the earliest an employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.