The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 is the first major legislative change to retirement rules in more than 10 years. It includes changes to both how you can save for retirement and how you can access those funds.
Here are 6 key areas affected by the SECURE Act.
1. Raises the RMD age to 72
The SECURE Act raises the age of required minimum distributions (RMDs) from 70 ½ to 72. If you turned 70 ½ in 2020 or later, your RMDs will now begin at age 72.
While it may seem like a small change, it can have a big impact. Delaying the RMD gives you more time to adjust to what your work and tax situation might be, retire a little bit later, and potentially be in a lower tax bracket when that taxable distribution is required.
2. Increases the IRA contribution age limit
Under the SECURE Act, you can now contribute to a traditional IRA if you’re still working and earning compensation. These contributions only apply to earned income. Passive income isn’t eligible.
3. Eliminates the stretch IRA
Previously, a person who inherited an IRA could “stretch out” RMDs from an IRA over their lifetime, letting those funds grow tax-deferred. These “stretch IRAs” were a popular estate planning strategy for families that wanted to leave their beneficiaries a source of income.
Now, most non-spouse beneficiaries of inherited IRAs must withdraw the balance within 10 years and pay taxes on it. Those who inherited an IRA before the SECURE Act took effect are grandfathered in and may continue to stretch out their RMDs.
If you incorporated stretch IRAs into your estate plan, consider reviewing your plans with your estate planning attorney and financial professional. Read more about inherited IRAs.
4. Allows you to use a 529 plan to pay student loans
If you have money in a 529 savings account, you now have the option to repay up to $10,000 a year in qualified student loans using those funds.
If you live in a state that allows a deduction for 529s, there may be a slight tax advantage to putting money into a 529 for the express purpose of paying down debt; consult with a tax advisor to find out for sure.
5. Lets you withdraw up to $5k from your 401(k) penalty-free for having or adopting a child
Individuals are now able to withdraw as much as $5,000 from a defined contribution plan, such as 401(k) or IRA, to help cover the costs of having or adopting a child without having to pay the normal 10 percent early withdrawal penalty.
Keep in mind that if you withdraw money from a retirement account, you miss out on compound interest for that amount. It could be a big difference in your retirement balance.
6. Makes it easier for small business retirement plans
The SECURE Act allows small businesses to band together to offer multiple-employer plans (MEPs), provides new tax credits for setting up plans, and simplifies some rules. It also allows part-time employees who worked at least 500 hours a year over the past three years to join employer-sponsored retirement plans.
Many provisions of the SECURE Act are intended to make retirement saving easier and more accessible. Consider working with your financial professional to learn more about how the SECURE Act may affect your retirement plans.
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