SECURE Act Update
March 7, 2020
As you may have heard by now, the new Setting Every Community Up for Retirement Enhancement Act or the SECURE Act passed Congress in the final weeks of 2019. This has created several changes for retirement plans and inherited assets. While there are many changes as well as new opportunities in the legislation, we wanted to alert you to the changes most likely to have an impact on you.
- Limitations to the “stretch” provision for Inherited IRAs:
Previously, if you inherited an IRA and were not the spouse of the deceased person, you had the ability to stretch the distribution of that account over your own lifetime using the IRS’ annual required minimum distributions rules. The SECURE Act has eliminated that provision for most beneficiaries and will now require those who inherit an IRA to take out all of the money in the account within 10 years, unless the beneficiary is one of the following:
- A spouse (then you can make the account your own personal IRA)
- A minor child (only until they reach the age of majority)
- Chronically ill
- Not more than 10 years younger than the decedent
You are not required to take these distributions in equal amounts over the 10 years – you just need to have removed all funds form the account by year 10. This may provide some new tax planning opportunities in dealing with these accounts.
- Required Minimum Distributions (RMD) from IRAs changed to begin at age 72 instead of 70 ½
Before the SECURE Act took effect, if you had an IRA account, you were required to take a minimum distribution from that account each year starting from when you turned 70 ½ on. The SECURE Act has updated the age for those distributions to begin to 72 for those who have not yet reached 70½ yet. If you have already begun your RMDs, you still need to continue taking them. But others can now prolong their distributions another year and a half.
- Removal of age 70 ½ contribution limit for IRAs
Previously, folks over the age of 70 ½ were not allowed to contribute to IRAs, even if they qualify under the income rules. The SECURE Act now allows anyone with earned income, regardless of age to continue making contributions, as long as you follow the income limit rules.
- 529 Plan Update
Distributions are now allowed to repay up to $10,000 in student loans and to pay for certain apprenticeship programs. This is a big deal, as previously you could not use excess 529 Plan assets to pay down student loans. However, this is a lifetime limit, not a yearly maximum. It is important to note that 529 funds can also be used to repay student loans up to $10,000 per each of the beneficiary’s siblings, as well as for the beneficiary themselves. It also allows 529 funds to be used to pay for apprenticeship programs under the new Act.
- New incentives to start 401k plans if you have a small business
The SECURE Act expanded tax credits for small businesses, both for those who start a new 401k and for those who add auto-enrollment to the plan to a new or existing plan. Additionally, part-time employees who have worked long term for the business can now join their company’s 401k plan- (although they still are not entitled to matching or nonelective contributions). The SECURE Act also made it easier for “multiple-employer” plans to exist – which allows multiple small business to pool their assets into one plan.
This summarizes the main changes in the new law that we believe have the biggest effect on clients. For a full, detailed account of all of the changes included in the SECURE act, we would like to direct you to the following website: https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment. However, if you would like to learn more about any of these items or how they affect you personally, we at KCS are here to assist you.
As always, we’re here if you have any questions!