What You Need to Know about the SECURE Act

January 10, 2020
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The challenges faced by our retirement system are well documented, from worries about Social Security’s reliability to the fact that most of us just don’t save enough for retirement.


Sadly, according to the U.S. Bureau of Labor Statistics, just more than half of American adults (55%) even participate in a workplace retirement plan, like a 401(k). And the ones who do participate are usually significantly underfunded.


The SECURE Act was designed to address these concerns by encouraging more employers to offer retirement plans by lowering the costs in addition to reducing some of the risks.


Here are the key provisions investors should know about.


RMDs Starting at Age 72

The SECURE Act pushes the age that triggers RMDs from 70½ to 72, which means you can let your retirement funds grow an extra 1½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.

This change applies only to those individuals who turn 70½ in 2020 or later. 


No Age Restrictions on IRA Contributions

Americans are working and living longer. So why not let them contribute to an IRA longer? That's the thinking behind the SECURE Act's repeal of the rule that prohibited contributions to a traditional IRA by taxpayers age 70½ and older. Now you can continue to put away money in a traditional IRA if you work into your 70s and beyond.



Inherited IRA Required Withdrawals

Previously, non-spousal beneficiaries of retirement accounts were able to “stretch” withdrawals over his or her lifetime. With the new SECURE Act changes, beneficiaries will be required to take post-death distributions at a more rapid payout – no more than 10 years. This change applies to deaths after December 31, 2019.



529 Plan Qualified Withdrawal Expansions

Students are now allowed to withdraw up to a lifetime amount of $10,000 of 529 Plan funds to pay back qualified student loans. As well, students can use tax-free 529 Plan withdrawals to pay towards fees, books, supplies, or required equipment.



Increased Tax Credits for Small-Businesses

The SECURE Act increases the business tax credit for plan startup costs to make setting up retirement plans more affordable for small businesses. The tax credit will increase from the current cap of $500 to up to $5,000 in certain circumstances. These changes also encourage small-business owners to adopt automatic enrollment by providing a further $500 tax credit for three years for plans that add auto-enrollment.


401(k)s for Part-Time Employees

Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years.


Penalty-Free Withdrawals for Birth or Adoption of Child

If you have a 401(k), IRA or other retirement account, the new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. (You'll still owe income tax on the distribution, though, unless you repay the funds.) If you're married, each spouse can withdraw $5,000 from his or her own account, penalty-free. You have one year from the date your child is born or the adoption is finalized to withdraw the funds from your retirement account without paying the 10% penalty.


Grad Students and Care Providers Can Save More

Contributions to a retirement account generally can't exceed the amount of your compensation. So, if you receive no compensation, you generally can't make retirement fund contributions. Under current law, graduate and post-doctoral students often receive stipends or similar payments that aren't treated as compensation and, therefore, can't provide the basis for a retirement plan contribution.


Similar rules and results apply to "difficulty of care" payments that foster-care providers receive through state programs to care for disabled people in the caregiver's home.


Under the SECURE Act, amounts paid to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) are treated as compensation for purposes of making IRA contributions. This will allow affected students to begin saving for retirement sooner. Similarly, "difficulty of care" payments to foster-care providers are also considered compensation under the new retirement law when it comes to 401(k) and IRA contribution requirements.


Credit Card Access to 401(k) Loans Prohibited

The new law flatly prohibits 401(k) loans provided through a credit card, debit card or similar arrangement. This change, which takes effect immediately, is designed to prevent easy access to retirement funds to pay for routine or small purchases.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.


Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing

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