Feb 10, 2020
The new Setting Every Community Up For Retirement Enhancement or SECURE Act recently signed into law by President Trump is one of the most significant pieces of retirement legislation in more than a decade. The law focuses on retirement planning in three key areas: 1) modifying required minimum distribution (RMD) rules for retirement plans; 2) expanding retirement plan access and 3) increasing lifetime income options in retirement plans. Ultimately, the law has significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets
Here are explanations of some key provisions. Unless noted, the new rules went into effect on Jan. 1, 2020:
- Elimination of the so-call “stretch IRA” – The Secure Act eliminated the “stretch IRA,” which allowed non-spousal beneficiaries to withdraw assets of inherited accounts over their lifetimes to optimize the beneficiary’s income tax deferral. Now, those who inherited an IRA since the beginning of 2020 and thereafter have 10 years to withdraw the assets — however or whenever they’d like — or face taxation of the money all at once. Spouses and disabled beneficiaries are among the exceptions to the rule. The new restrictions pose a problem for people who have been planning to use IRAs as an inheritance vehicle.
- Increases the required minimum distribution (RMD) age for retirement accounts – Distributions must begin from traditional IRAs when savers reach a certain age. The SECURE Act raised the age for these required minimum distributions (or RMDs) from 70½ to 72. This will enable individuals between these ages to keep money in their IRAs longer and put off paying income taxes on withdrawals if they don’t need funds yet to pay for living expenses. However, the new rule does not apply to those already older than 70 ½ or turned 70 ½ in 2019 (born on or before June 30, 1949). Those individuals must continue or begin taking RMDs under the old rule.
- Allows long-term, part-time workers to participate in 401(k) plans – The SECURE Act requires employers to permit long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods to participate in their plans (other than collectively bargained plans). However, an employer will not be required to make matching or nonelective contributions on behalf of such employees and may continue to impose an age-21 requirement.
- Permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses – The new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses, up to $5,000 limit would apply to each parent, including those who have adopted children. So technically, a couple could take out up to $10,000 from their retirement savings, as long as they both have separate accounts in their own names.
- Allows parents to withdraw up to $10,000 from 529 plans to repay student loans – The list of qualified expenses has now expanded under the SECURE Act. Most notably, 529 assets can now be used to pay for qualified education loan repayments (up to $ 10,000-lifetime maximum) and costs for an apprenticeship program.
Contact your William Vaughan Company tax professional if you have additional questions about how the SECURE Act impacts your retirement plans. Changes in the tax code, family relationships, and your own financial circumstances are common—requiring that you update your planning strategies every few years. Remember, your plans should evolve as you do. Look for additional tax alerts from William Vaughan Company as we roll out more information on how the SECURE Act impacts retirement plan administration.
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