SECURE Act Highlights: Summary of Retirement Plan Changes

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I try to ignore talk about pending legislation, but the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) has now been passed by Congress and signed into law by President Trump. Portions are effective as of January 1st, 2020. Instead of going into fine detail, I think this Practical Law article provides a concise summary of all the major points. This way, you can skim it and only dig further if it applies to your specific situation. Many of the points deal with employers, but here are the highlights that apply to workers:

Increased 401k eligibility for part-time employees.

The Act requires that 401(k) plans permit participation by long-term employees working more than 500 but less than 1,000 hours per year in three consecutive years. This provision is effective for plan years beginning after December 31, 2020.

Penalty-free withdrawals for birth of child or adoption.

A new distribution rule will allow participants to take a penalty-free withdrawal of up to $5,000 from a plan following the birth or legal adoption of a child. The distribution option applies to 401(k) plans, 403(b) plans, governmental 457(b) plans, and Individual Retirement Account (IRA). It does not apply to defined benefit plans.

Required minimum distributions now start at age 72.

Currently, required minimum distributions from a retirement plan or IRA must start once an individual turns age 70.5. Under the Act, this age is increased to age 72. The change is effective for distributions required to be made after December 31, 2019, with respect to individuals who turn 70.5 after December 31, 2019.

“Stretch” inherited IRAs eliminated, replaced with 10-year time limit.

For defined contribution plans and IRAs, where a participant dies before the distribution of their entire interest, the distributions must now be made by the end of the tenth calendar year following the participant’s death. The new requirement does not apply if the beneficiary is an eligible beneficiary (for example, a surviving spouse or minor child).

Added lifetime income (annuity) options to your 401k/403b/457b.

The Act permits participants in defined contribution plans, 403(b) plans, and governmental 457(b) plans to take a distribution of lifetime income investment in the form of an annuity if: The lifetime income investment is no longer authorized to be held as an investment option, OR The distribution is made as a direct rollover to a retirement plan, IRA, or annuity contract.

No longer a maximum age for contributions to a traditional IRA.

Previously, you could no longer make contributions to a traditional IRA for the year during which you reached age 70 1/2 or any later year. There is (still) no age restriction for Roth IRA contributions.

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Comments

  1. I wonder if somehow the government has found a way to communicate with Franz Kafka and George Orwell to provide the names for the atrocious laws they pass?

  2. Does the change to “Stretch” inherited IRAs effect existing ones?

  3. Does any of this change your strategy over the next 10 years?

  4. Can you please elaborate on “The new requirement does not apply if the beneficiary is an eligible beneficiary (for example, a surviving spouse or minor child)?”

    • The 10-year rule doesn’t apply if the original owner is your spouse (or if you’re a minor and it was your parent). Before, if you inherited an IRA from your parents or grandparents and you were an adult, perhaps a young adult, you could spread out the distributions over your lifetime based on your life expectancy. If you inherited an IRA when you were 25, your life expectancy is long so you could leave most of it in there, defer all those taxes, and watch that thing keep growing and compounding away.

  5. Students can contribute stipends and also caregivers was good. Besides the student loan payment provision also is a positive. Here are the 9 items I covered https://financialfreedomcountdown.com/what-is-the-secure-act-and-9-ways-it-will-actually-boost-your-retirement/

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