The SECURE Act of 2019 – How the Latest Bill Signed into Law Could Affect Your Retirement

In June of 2019, I wrote a blog article on The Secure Act of 2019 that was passed by the House of Representatives.  At that time, it was expected that the Senate would approve the bill, but we were unsure of what changes might be made by the Senate prior to their approval. The bill has been signed into law so the purpose of this article is to provide the final provisions and how it could affect your retirement.

Here is what you need to know about the latest retirement law changes:

(Disclaimer: This article provides a summary of the changes that are most likely to affect you as an individual.  Significant changes were also made to 401(k) and other employer plan provisions which are not covered here.  To read the bill in its entirety, click here. The retirement portion of the bill starts on page 604)

IRA Plans

Required Minimum Distributions (RMD’s):

Previous law required that individuals generally begin taking distributions from their retirement plans at age 70 ½. The SECURE Act increases the age at which distributions are required from age 70 ½ to age 72.  This applies to individuals who turn age 70 ½ after December 31st, 2019. Any Individuals who turned age 70 ½ prior to December 31st, 2019 are subject to the previous RMD provisions.

IRA Contributions:

Previous IRA law did not allow contributions into an IRA after the age of 70 ½ even if an individual is still earning income. The SECURE Act eliminates this restriction and allows IRA contributions if an individual has earned income no matter their age.

Qualified Charitable Distributions (QCD’s):

Previous law allowed an individual who was age 70 ½ or older to donate up to $100,000 per year ($200,000 per couple) to a qualified charity directly from their IRA accounts and count this amount towards their Required Minimum Distribution (RMD).  Essentially, this allowed someone to withdraw money from their IRA without having to pay taxes on the withdrawal if the money was being given to charity.  This provision remains intact even though the RMD age is now 72.

A new rule has been added that applies to individuals who make deductible IRA contributions after age 70 ½. Deductible IRA contributions made during or after the year an individual turns age 70 ½ must be subtracted from future QCD amounts. For example, if an individual is still working and makes deductible IRA contributions of $7,000 per year from age 70 ½ to age 73 ½, they now have $21,000 that will need to be subtracted from any future QCD amounts.  The purpose of this provision is to prevent individuals from making a deductible IRA contribution and then later gifting this money to charity, resulting in a double tax deduction.

Qualified Birth and Adoption Distributions:

Based on current IRA law, most withdrawals from a retirement account are subject to a 10% early withdrawal penalty if they are taken before you reach 59 ½. However, there are certain exemptions allowing a penalty-free withdrawal. The SECURE Act adds an additional exemption for any “qualified birth or adoption distributions”. The aggregate amount of a penalty-free withdrawal for this purpose cannot exceed $5,000. The withdrawal can be taken at any time within the first 12 months from the child’s date of birth or from the date the legal adoption is finalized.

Inherited IRA Account Distributions:

Based on the previous IRA rules, an individual who inherits an IRA account is required to take out a certain amount of money from the account each year and count it as taxable income on their tax return.  This amount is calculated by taking the balance of the account at the end of the prior year and dividing it by the life expectancy of the individual who inherited the account.   This allows them to benefit from substantial tax-deferred growth. For example, if a 20-year-old beneficiary inherited an IRA from their grandfather, they can currently keep their money in an inherited IRA, growing tax-deferred over the next 60 to 70 years with small distributions being taken annually.  The SECURE Act eliminates this potential by stating that those who inherit an IRA account after December 31st, 2019, and who do not qualify as an “eligible designated beneficiary” will be required to liquidate the inherited account within 10 years from the date of death of the original account owner. The only individuals who will not be subject to the 10-year rule are surviving spouses, minor children until they turn the age of majority (18 or 21, depending on the state), disabled or chronically ill individuals, or individuals who are not more than ten years younger than the original account holder. Minor children who inherit an account will be required to liquidate it within ten years of the age they reach majority. Keep in mind that any account inherited before December 31st, 2019, is subject to the previous IRA distribution rules.

529 Plans

Expansion of 529 Plans:

The SECURE Act expands 529 education savings accounts to cover costs associated with:

• Registered Apprenticeships

• Homeschooling

• Private elementary, secondary, or religious schools

Using a 529 plan for Student Loan Payments:

The SECURE Act allows up to $10,000 of qualified student loan repayments (including those for siblings of the 529 plan account holder) to be treated as a “qualified education expense” and, therefore, not subject to Federal tax or withdrawal penalties that would otherwise have applied.

Final Thoughts

The Secure Act of 2019 includes significant changes to the law that provide tax and retirement planning opportunities previously unavailable.  Please contact me if you want to learn more about how these changes may impact your retirement plan.