The SECURE Act: Understanding How It Will Impact Your Retirement Savings

by Ann F. Schrooten, Estate Planning Attorney

The SECURE1 Act, which was signed into law in December, is the most significant retirement legislation in more than a decade. The Act puts into place numerous provisions intended to strengthen retirement security and make saving for retirement easier and more accessible for many Americans. The Act includes provisions that:

  • delay the starting age for required minimum distributions;
  • eliminate the maximum age for making tax-deductible IRA contributions; and
  • expand the scope of penalty-free withdrawals and tax-free distributions from 529 plans.

The Act also eliminates the “stretch IRA” by reducing the period of tax-free distributions for many types of account beneficiaries.

Below are some of the SECURE Act’s key changes and what they mean for current retirement savers and future retirees.

Age for Required Minimum Distributions Increased to 72

The Act increases the age, from 70½ to 72, at which an individual must begin taking required minimum distributions (RMDs) from their traditional IRA or other tax-favored retirement account. This change applies beginning with traditional IRA account owners who will attain the age of 70½ on or after January 1, 2020. Persons who reached the age of 70½ in 2019 or before still need to make the required minimum distributions in 2020.

Age Restriction on Traditional IRA Contributions Eliminated

The SECURE Act eliminates the maximum age for traditional IRA contributions, which was previously capped at 70½ years. As Americans live longer, an increasing number continue employment beyond traditional retirement age. The Act allows anyone who is working and has earned income to contribute to a traditional IRA regardless of age. The maximum amounts you can contribute to a traditional IRA for 2020 are $6,000 per person under age 50 and $7,000 if you are age 50 or older.

Stretch IRA Eliminated for Certain Inherited IRAs

Previously, beneficiaries who did not inherit their accounts from a spouse were in some cases allowed to withdraw required minimum distributions for the span of their lives – thanks to an option known as a “stretch IRA.” The Act reduces the withdrawal period and requires most non-spouse beneficiaries to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. There are no required minimum distributions within those 10 years, but the entire balance must be distributed by the end of the 10th year.

Beneficiaries excepted from the 10-year distribution requirement include a surviving spouse, a minor child of the decedent, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.

Penalty-Free Withdrawals for Childbirth and Adoption Costs

The Act allows an individual to take a “qualified birth or adoption distribution” of up to $5,000 during the first year after the birth or adoption of a child. This distribution is not subject to the 10% early withdrawal penalty.

Expansion of Section 529 Plans

A 529 plan was originally designed as a college savings plan. The Act expands a 529 education savings account to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments, and elementary and secondary tuition costs. Distributions for student loan repayments includes distributions to pay qualified student loans for siblings.

Conclusion

If you are the owner of a tax-favored retirement account, the SECURE Act should prompt you to review your accounts and IRA beneficiary designations to ensure that you take full advantage of the new law’s provisions and avoid any potential risks.

Ann Schrooten is a Casa Grande estate planning and probate attorney with the Fitzgibbons Law Offices (520-426-3824).

1SECURE is an acronym for “Setting Every Community Up for Retirement Enhancement.”