What You Should Know About the SECURE Act

James Moore & Co talks retirement planning

To some, retirement seems to be in the distant future. For others, it looms right around the corner.

For all, however, the recently passed Setting Every Community Up for Retirement (SECURE) Act will change retirement planning.

James Moore & Co. in Tallahassee offers retirement planning services that integrate all of the new rules required by this act.

“We as a firm can provide guidance and assistance in getting ready for retirement or helping your business put into place the rules that are a part of this act,” said Nadia Batey, CPA with James Moore.

“Regardless of your age, you are never too young or too old to start addressing your retirement plan. It’s best to be proactive.”

This act brings significant changes that will affect many people. Below, we will outline the provisions.

Increased age for IRA Contributions and RMDs

In one of the simpler provisions outlined in the bill, the age for required minimum distributions (RMDs) has been raised from 70½ to 72.

Under the new legislation, distributions required to be made after December 31, 2019 can be deferred until the account holder reaches the age of 72.

Additionally, individuals of any age can make contributions to traditional IRAs as long as they’re currently earning compensation from wages or self-employment.

This aligns traditional IRA contribution rules with those of Roth IRAs and 401(k) plans. It’s a move designed to support an aging workforce and rising life expectancies.

This legislation could be further affected by pending IRS rules regarding RMDs. The result is that retirees might be required to take less of an RMD each year of their retirement.

Changes to Inherited IRA Rules

The SECURE Act will also change the way inherited IRAs are handled. In simplest terms, the old rules allowed beneficiaries to take distributions over their lifetime.

The new legislation replaces lifetime benefits with a 10-year window of withdrawal for beneficiaries.

This decision is almost sure to incur big tax penalties for beneficiaries of pass-through trusts and inherited IRAs. The silver lining? Those already drawing from inherited IRAs will be grandfathered in with their current RMDs.

There are a few exceptions to this 10-year rule. Surviving spouses, children of the participant who have not reached the age of 18, chronically ill individuals, and any other individual who is not more than 10 years younger than the participant can still elect to take the distribution over their life expectancy.

529 Plans

Starting in 2019 (retroactive date), tax-free distributions from 529 plans can be made for the expenses of registered apprenticeships.

They can also be used to pay up to $10,000 toward the principal or interest on a qualified education loan to the designated beneficiary (or a sibling of the designated beneficiary).

Penalty Free Early Retirement Distributions for Birth or Adoption of a Child.

Starting in 2020, penalty-free distributions of up to $5,000 from a retirement plan can be made to pay for the expenses of a birth or adoption.

A married couple can use up to $5,000 each for a qualified birth or adoption.

Under the old rules, these distributions would be subject to a 10% penalty. Income tax, however, will still be owed on the withdrawal.

Part-time 401(k) Contributions

In another effort to bolster retirement planning and contributions among workers, the SECURE Act has opened 401(k) contributions to part-time workers.

Starting in 2020, employers can allow workers logging a minimum 1,000 hours in one year (roughly 20 hours a week), or three consecutive years of at least 500 hours, to participate in employer-sponsored 401(k) plans.

Starting in 2021, most employers maintaining a 401(k) will be required to allow these employees to make elective deferrals.

This provision is designed to benefit new entrants to the workforce and employed seniors—groups more likely to work part time—by positioning them well to capitalize on retirement planning.

Small businesses also benefit, receiving up to $500 in tax credits when employees are automatically enrolled in a 401(k) or simple IRA.

Changes to Retirement Planning

With these new provisions, the SECURE Act is sure to shift the tax planning landscape.

Financial planners, employers, investors and retirement-conscious individuals should reevaluate their stance on retirement planning—particularly as it pertains to lifelong income.

While it’s unknown what effect some of these changes will have, it’s safe to say that some adjustments will have to be made. Consult with a tax-planning professional today to get ahead of them.