The SECURE Act

Three months ago, Congress passed legislation known as the SECURE Act, Setting Every Community Up for Retirement Enhancement Act. The passing of this legislation was a prominent topic within the financial industry, though it may not have drawn as much attention in popular media. This legislation should have been more widely covered, because it affects such a vast group of people. If you are a retirement account owner, beneficiary to a retirement account, or even the owner of a 529 plan, this legislation may affect you. We wanted to review some of the legislation in our newsletter because it directly affects so many of our clients, prospective clients, and readers. The new legislation addresses a multitude of topics, but we decided to focus on the sections of the law that may potentially affect our target audience the most. Section 106: Repeal of Maximum Age for Traditional Individual Retirement Account (IRA) Contributions Synopsis: The legislation will change the maximum age an individual can contribute to a traditional IRA from age 70 ½ to age 72, subject to certain limitations that are currently in effect. What this means: Previously, when someone with earned income attained the age of 70 ½, they could no longer contribute to a traditional, pre-tax IRA, solely because of their age. Under the new law, you will be able to contribute to a deductible IRA until the age of 72, assuming that you meet the other requirements. Section 111: Allowing Long-term Part-time Workers to Participate in 401K Plans Synopsis: “The bill will require employers maintain a 401K plan to have dual eligibility requirements under which an employee must complete either a one year of service requirement, working 1,000 hours or less, or three consecutive years of where the employee completes at least 500 hours of service. “ What this means: For those of you who work part-time and have not had access to your employer’s defined contribution plan (401K), your employer may now be required to open their retirement plan to you. That is assuming you have met the hours worked and age requirements for part-time employees. Section 112: Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption Synopsis: The legislation will allow for withdrawals from retirement accounts to be penalty-free if the funds are used towards child birth or adoption. What this means: The government will allow you to withdraw up to $5,000 penalty free from your employer defined contribution plan (401K) or IRA, if the funds are used towards adoption or child birth expenses. Beware, you may still have to pay income taxes on this withdrawal, just no 10% penalty. Section 113: Increase in Age for Required Minimum Distribution (RMD) Synopsis: Previously, the law stated that individuals must take a distribution from their retirement account(s) in an amount that is based upon the IRS Uniform Lifetime chart. Retirement account holders had to begin taking distributions from their accounts by April 1st in the year that followed the year in which the account owner turned 70 ½. The new legislation has increased the age for this first distribution to age 72. What this means: Starting at age 72, retirement account owners must begin their required minimum distribution process. Meaning, account owners will be required to withdraw from their retirement account(s) on an annual basis in an amount that is in accordance with the IRS Uniform Lifetime chart beginning by April 1st in the year following the year the account owner turns 72. Previously, people had to begin this annual process by April 1st of the year after they made age 70 ½. But, because people are living and working longer, Congress has decided to increase the age to start withdrawals. Section 302: Expansion of Section 529 Plans Synopsis: “The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.” What this means: This legislation will increase the list of expenses that are considered qualified expenses. Therefore, this legislation will provide 529 account owners more educational opportunities to use their withdrawals. As a reminder, if 529 plan funds are used toward a qualified educational expense, the earnings within the distribution will be excluded from any taxes. Section 401: Modifications to Required Minimum Distribution Rules for Inherited IRAs Synopsis: The new laws have changed the required minimum distribution for those that have inherited IRA balances. Due to the new legislation, except for some exclusions discussed below, individuals that inherit retirement accounts will be required to withdraw all of the money from the inherited account by the end of the 10th calendar year following the year of the original retirement account owner’s death. What this means: Previously, if someone had inherited a retirement account, except for exclusions mentioned below, then they were required to withdraw the money on an annual basis based upon their own IRS Uniform Lifetime income schedule or the schedule of the original retirement account owner. Because this was based upon an IRS withdrawal schedule in most cases, the new account owner was allowed to withdraw funds on a gradual basis for a long period of time, in most cases longer than 10 years. This gradual withdrawal process was known as the Stretch IRA. Now, IRA inherited funds have to be withdrawn within 10 years, in most cases. There is no requirement as to how much must be withdrawn and in what increments, just that all of the funds must be withdrawn by the end of year 10. There are some exceptions to this rule. If the person that inherits the retirement account is a spouse, disabled, chronically ill, individuals who are not more than 10 years younger than the decedent or certain minor children then they do not have to withdraw the funds within 10 years and have special withdrawal requirements. Please consult your tax advisor if you have any questions concerning the exceptions. If you have any additional questions concerning the SECURE Act, I would recommend you research the legislation further or contact your tax advisor. Disclaimer: Our newsletter is for providing general information about the above subject matter covered. It is not intended to serve as tax advice to your respective situation. We recommend you consult your tax advisor regarding your specific situation. Sources: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf