What Does the New SECURE Act Mean to You?
Here are the key provisions of the SECURE (Setting Every Community Up for Retirement Enhancement) Act and what they might mean to you.
Change to required distribution age from certain retirement accounts
What it is: You probably know that you're allowed to start taking distributions from retirement accounts like 401(k)'s and IRAs any time after you turn 59 1/2, but you're also required to take a certain amount out of any pre-tax (aka "traditional") 401(k) and/or IRA accounts once you reach a certain age under most circumstances. The SECURE Act changed that age from 70 1/2 to age 72 for anyone turning 70 1/2 after 2019.
How it affects you: If you were born after June 30, 1949, and you have money in a pre-tax retirement accounts, you'll have an extra 18 months before the required withdrawals begin. It's worth noting that if you consider yourself to be the average American who retires in their 60's, then chances are that the withdrawals you'll already have to make from your retirement savings to pay your bills will likely satisfy most, if not all, of this requirement. But for those who manage to amass some decent savings, you'll have a little longer to let it grow before the IRS will start requiring you to take some so they can get their share.
What's not changing: If you're still working at the age of 72, you won't be required to withdraw from your 401(k) or 403(b), although if you have any IRAs outside of your workplace retirement, you'll have to start withdrawing at 72. That hasn't changed.
You can keep contributing to your pre-tax IRA past age 70 1/2
What it is: While there are lots of rules around contributing to IRAs depending on your income and eligibility for other retirement savings plans, the biggest one is that you must have at least enough earned income to support your contribution, which means that someone who is retired and no longer working can't put money into an IRA, but the old law also said that once you're 70 1/2, even if you still have earned income, you can't put money in an IRA anymore. The SECURE Act eliminated that rule for traditional IRAs, which aligns it with the Roth IRA rules, which never had an age limit.
How it affects you: Basically, if you want to work after you're 70 1/2, you can also continue to contribute to an IRA if you'd like.
You can use 529 plan money to pay up to $10k toward student loans
What it is: Basically the law amended the definition for a "qualified distribution" from a 529 savings plan to include payments for certain apprenticeship programs as well as up to $10,000 toward qualified student loans.
How it affects you: The first provision about apprenticeship programs simply expands what funds can be used for, which is good news for people who have 529 savings set aside for them, but don't wish to pursue a college degree.
The other provision would allow you to withdraw up to $10,000 (note it's a lifetime limit, not an annual thing) to pay down student loans and still consider it a qualified distribution under federal law. One example where this would apply would be if you and a sibling have equal 529 accounts, but not enough to cover your entire cost of education, causing you to take out student loans once your 529 is depleted. If your sibling ends up not needing their entire 529, perhaps due to a scholarship or other reason, you could use up to $10k out of their account to pay down your loans.
Worth noting: As of this writing, this new provision only applies to federal rules, which means that your state may not consider distributions to pay student loans to be qualified. Before you take advantage of this, be sure to consult a CPA to make sure you're not causing unintended state tax consequences.
If you inherit an IRA from a non-spouse, you could face higher taxation
What it is: Under old rules, inheriting an IRA from someone who is not your spouse offered several options for when to take the money, including the ability to spread the distributions out over your own life expectancy under certain circumstances, which basically meant that you could spread out the taxes on that money over you lifetime. The SECURE Act changed that rule to be much simpler: if you inherit an IRA from anyone but a spouse, you'll be required to take all of the money out within 10 years of the original account holder's death.
The exception to this rule would be if you are less than 10 years younger than the person who passed (for example, if you inherit from your sister who is 2 years older, then you can still use your own life expectancy versus 10 years to distribute the account if you wish) or if you are disabled.
How it affects you: If anyone besides your spouse who is 10 years older than you or more (such as a parent or grandparent) were to name you as the beneficiary of their traditional (aka pre-tax) IRA, when they pass away, you'd have to withdraw and pay taxes on the full balance within 10 years. Depending on the size of the account, this could have significant tax consequences for you – the purpose of this rule change is to raise an estimated $15 billion more in tax revenue than previous projections.
Note that you can wait until the 10th year and withdraw the entire account at once, so there are some planning opportunities depending on your situation, but either way, by year 10, the account must be at $0.
What can you do to plan for this: If you are a traditional IRA account owner who plans to leave their account to a non-spouse, this rule change provides another reason to consider converting your IRA to a Roth throughout your lifetime – you'll pay taxes on any amounts converted, but with proper tax planning (a CPA can help with that!), you can help your heirs avoid potential large tax bills upon your death as Roth IRAs do not have any mandatory distribution provisions. Remember, the taxes have already been paid on that money – by you!
Ability to withdraw up to $5,000 from a 401(k) for having or adopting a child
What it is: Once you've contributed funds to a 401(k) account, in order to withdraw them outright before you're 59 ½, the IRS says you have to experience certain hardships, which they define. Some of those hardships also provide an exception to the 10% early withdrawal penalty, including this new provision. The hardship definition was expanded to include the birth or adoption of a child, up to $5,000.
How it affects you: If you bring a new child into your life via birth or adoption and find yourself in need of funds, you now have the additional option of withdrawing up to $5,000 from your 401(k) without a penalty. Keep in mind that any traditional 401(k) withdrawals would still be taxable and doing so could have a negative impact on your retirement plans, so it's a good idea to consult a CPA to explore all your options if you're thinking of doing this.
There are other provisions in the Act that make it easier for employers to help employees save for retirement and some that affect what investing options can be offered, but these are the main aspects that could affect the everyday American depending on your circumstance. To calculate whether you're saving enough to support the retirement lifestyle you envision, use the Retirement Planner calculator to see what it will take.