What is the SECURE Act?
The SECURE Act passed on May 23, 2019, at 11:35 by the Yays and Nays: 417-3 (Roll no. 231). It is the largest piece of retirement-focused legislation since the Pension Protection Act of 2006.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law by President Trump on December 20, 2019, as part of the larger Further Consolidated Appropriations Act, 2020.
The bill was drafted to address Americans’ difficulty in saving for retirement. There were several adjustments made to Individual Retirement Accounts (IRAs) to provide more tax-advantaged ways to save for retirement.
SECURE made several changes to IRAs, most of which are considered to be largely positive for IRA owners. Namely, the elimination of the age limit on making contributions so long as the individual or their spouse has earned income and pushing back RMDs to age 72
How did the SECURE Act Impact IRA Owners?
Required minimum distributions (RMDs) must now start no later than April 1 of the year following the year the individual turned 72. This new rule applies only to individuals who did not turn 70½ in 2019.
Qualified Charitable Distributions are still allowed, starting at age 70½. However, these distributions will now be offset by any deductible IRA contributions made in the same year.
A new “qualified birth or adoption withdrawal,” up to $5,000, maybe taken from an IRA or employer plan within one year of birth or adoption. These withdrawals are not subject to the 10% early withdrawal penalty or the mandatory 20% withholding (from plans).
The definition of “qualified higher education expenses” (for 529 plan withdrawals) was amended to include:
- costs associated with apprenticeships; and
- the repayment of student loans.
A major change to the distribution options of inherited (beneficiary) IRAs is arguably the Secure Act’s greatest change. For any IRA owner or plan participant who dies on or after January 1, 2020, “designated beneficiaries” (natural persons) are now required to withdraw their inherited interest within 10 years of the death of the original owner.
How Did the SECURE Act Affect Beneficiaries?
It is anticipated that most IRA and plan beneficiaries will fall under this new “out-in-10” rule.
However, SECURE also created five categories of “eligible designated beneficiary” (EDB). These beneficiaries may still opt for a lifetime payout schedule (a.k.a., a “stretch” distribution) with some limitations.
Eligible designated beneficiaries are:
- Surviving spouse – business as usual.
- Minor children of the owner/participant – may stretch only while minors.
- Disabled beneficiaries – unable to engage in any substantial gainful activity.
- Chronically ill beneficiaries – unable to perform at least two Activities of Daily Living
- Beneficiaries not more than 10 years younger than the owner/participant – for example, sibling beneficiaries. Upon the death of any EDB, the successor beneficiary is limited to the out-in-10 payout. Likewise, for any grandfathered (pre-SECURE) stretch IRA, once the original beneficiary dies, the successor beneficiary must take the remaining balance within 10 years.
- For non-natural beneficiaries (estates and trusts), the pre-SECURE rules still apply – the beneficiary IRA must be emptied within five years (out-in-5).
- Exception #1 – qualified or “see-through” trusts can use out-in-10 instead of out-in-5.
- Exception #2 – a stretch distribution may still be available to a see-through trust if the beneficiary of the trust is an EDB.
SECURE enjoyed broad bipartisan support in both the House and Senate
SECURE makes many positive changes to employer-sponsored retirement plans to help Americans save for retirement
One major change to retirement plans is increased flexibility for plan sponsors in offering lifetime income guarantees to participants via annuities
New withdrawal options were created for IRAs (birth or adoption of a child) and for 529 plans (apprenticeships and paying student loans)
Retirement planning isn’t rocket science but it does take a little time, effort, and discipline. Use our Retirement Calculators to see if you’ll have enough to retire at your desired age, or, how much you need to save monthly to get there.
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