The SECURE Act: 5 Things You Should Know

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.

5 Ways the SECURE Act Could Impact Your Retirement Planning

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.)

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.

Other Provisions of the SECURE Act

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:

• Increases the tax credit cap for small plan startup costs to $5,000 from $500.
• Provides a tax credit of up to $500 per year for employers who use automatic enrollment in their 401(k) or SIMPLE IRA plan.
• Encourages small businesses to set up retirement plans by increasing access to “safe harbor” plans.
• Allows penalty-free withdrawals from 401(k)s and IRAs to help offset costs related to having or adopting a child — up to $5,000 per adoption or birth.
• Allows for the use of up to $10,000 per beneficiary from 529 accounts to make student loan payments.
• Requires plan administrators to begin offering projections for lifetime income at least once a year in addition to providing information about the size of the nest egg.

What’s Next for Your Retirement?

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.