The SECURE Act is included in the appropriations bill just passed by Congress. Here’s what you need to know about the changes coming to retirement.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was unexpectedly included in an appropriations bill passed by the Senate on December 19, 2019, and signed into law the next day.
The SECURE Act brought substantial changes to the retirement system—and could affect your own retirement planning efforts. Here are some changes to be aware of.
1. RMD Age (for Some) Pushed Back to Age 72
Right now, those with traditional IRAs have to start taking required minimum distributions (RMDs) by April 1 following the year in which they turned 70 ½. The SECURE Act, recognizing that people live longer, pushed back the age at which you have to start taking RMDs. Starting in 2020, you may begin taking them by April 1 in the year following the year in which you turn 72.
This provision took effect on January 1, 2020. So, if you turned 70 ½ in 2020, you would have received a reprieve until age 72. However, if you were already 70 ½ at the end of 2019, you’re stuck with the old rules and should have taken your first RMD no later than April 1, 2020. And if you’re already receiving RMDs (or required to) because you’re older than 70 ½, you must still continue to receive your RMDs or face the 50% penalty. To sum it up, anyone born on or before June 30, 1949 should be currently taking RMDs.
If you’re in a 401(k) or other employer qualified plan, you already had an exception to the normal 70 ½ required beginning date for RMDs, but you had to still be working for the company to take advantage of it. If you’re still working for the company with the 401(k) plan, and 70 ½ or older, you can postpone your RMD until you quit/retire from your employer. This ability to delay RMDs until you actually quit/retire remains the same under the SECURE Act.
So, what’s changed? If you’re no longer working for the company that offered you the 401(k), then you can wait until age 72 to take your first RMD. But remember, just like in an IRA, if you’re already taking RMDs because you’ve reached age 70 1/2, you must continue, no matter your age in 2022. Also, if you turned 70 1/2 by December 31, 2019 (and were no longer working), then you should have started RMDs no later than April 1, 2020. Thus, if you were born on or before June 30, 1949, you won’t be able to delay until age 72.
2. Removal of Traditional IRA Contribution Age Limit
Before 2020, if you were 70 1/2 or older, you couldn’t make contributions to a traditional IRA. However, as of January 1, 2020, that restriction was no longer in place. There are no longer age restrictions on making IRA contributions. So, it’s possible to take RMDs at some point and still be able to put money into your traditional IRA. Whether it’s deductible still will depend on your modified adjusted gross income. (See IRS Pub 590-A for income limits for deductions.)
How much do you need to save to reach your retirement savings goal? Find out by answering a few questions.
Note that the effective date won’t change your ability for the 2019 tax year. If you were hoping to make a previous year contribution for 2019 after the first of the new year, and you’re older than 70 ½, that won’t work. The change is only for 2020 contributions and years going forward.
Remember that you can still make Roth IRA contributions regardless of age as long as your income is below the appropriate adjusted gross income threshold. That did not change under the SECURE Act.
3. Part-Time Workers Might Be Able to Access Retirement Benefits
The SECURE Act also expanded access to certain employer-sponsored retirement plans. Starting with the 2021 plan year, employers were expected to offer retirement benefits to workers who have been with the company for at least three years and who work 500 hours or more each year. Employers may not have to contribute for these employees but are required to allow employees to contribute for themselves. More information will be needed on this aspect of law, so stay tuned.
Right now, some employers aren’t required to offer coverage to those who work less than 1,000 hours for the company in a year. This may change the landscape for part-time workers, including older employees who work part-time during retirement.
4. Elimination of Stretch IRAs
Many folks save in IRAs for themselves, but also because at their death, they want to leave some of their savings to heirs or beneficiaries. Beneficiaries who receive an inherited IRA are generally able to elect how frequently they receive the money. One choice is what is known as a “stretch” IRA, which allows beneficiaries to withdraw money based on life expectancy. With the SECURE Act in place, however, this choice went away for many.
Instead, most non-spouse beneficiaries have to draw down the IRA by the end of the 10th year following the plan owner’s death. The account must be fully depleted by the end of the 10-year time horizon, and in some cases, withdrawals may still need to be made annually. There are some exceptions, such as for disabled non-spouse beneficiaries and beneficiaries not more than 10 years younger than the original account owner. Also minors won’t see that 10-year clock start until they reach age 21.
There are a lot of nuances, so see our article on inherited IRA accounts for the latest updates.
The elimination of stretch IRAs could potentially force beneficiaries to take larger distributions from inherited IRAs and might result in higher taxes, depending on the situation. For example, Roth IRA distributions are generally not taxable to beneficiaries, so taking the money out of the inherited Roth IRA probably has minimal impact on Roth beneficiaries. Traditional IRA beneficiaries do have to pay taxes on most or all of their payments though.
5. Easier to Include Annuities in Plans
Right now, many employers don’t include annuity choices in their workplace retirement plans because of the legal and fiduciary requirements.
However, the SECURE Act reduced some of the fear of liability, and the result could be more lifetime income products being included in employer-sponsored retirement plans like 401(k)s. For those hoping to include these types of products in their retirement planning, the SECURE Act could be helpful.
In addition to the above changes, the SECURE Act also included other provisions designed to encourage small businesses in offering retirement benefits to employees. These provisions have different effective dates, so do your research before trying to use these provisions. Here are some other key ways this legislation impacted the retirement landscape:
With the effective date of January 1, 2020, many of these law changes required operational changes, so please be patient and ask questions if you get information that conflicts with what you learned about the SECURE Act. When making your own retirement plans, take into account some of these provisions, including the later date for RMDs as well as the possibility of continuing to make traditional IRA contributions later in life.
Need help? Visit the TD Ameritrade retirement planning page or schedule a free goal planning session with a Financial Consultant to get a feel for your choices and how you might be able to make the most of the changes from the SECURE Act.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.