Major Changes to Retirement and Savings Accounts: The SECURE Act

We previously provided a brief overview of four major areas where the passage of this law might affect your financial planning, estate, and tax decisions; review it here.

When the SECURE Act was passed in late December 2019, it was considered to be a game-changer for retirement, with the goal of improving retirement security and access for many Americans. Here’s an in-depth look at some of the changes, and how they could affect you and your loved ones.

Required Minimum Distributions

An RMD, or the minimum amount you must withdraw from your IRA, 401(k), or other retirement account each year, previously was required of those who had reached age 70 ½. Under the SECURE Act, this age has increased from 70 ½ to 72. However, the new law does not apply to those who turned 70 ½ by the end of 2019: you must take your first RMD by April 1, 2020.

Change to Traditional IRAs and QCDs

For 2020, the maximum amount you’re allowed to contribute to an IRA is $6000 if you’re under 50, and $7000 if you’re 50 and older. Prior to the SECURE Act, you weren’t allowed to contribute to a traditional IRA past age 70 ½. But as Americans live (and work) longer, the SECURE Act says that as long as you’re still earning an income at age 70 ½, you can continue to contribute to your traditional IRA. 

The biggest impact of this change might be felt in the way that qualified charitable donations are handled. You can donate up to $100,000 to a qualified donation, but the SECURE Act introduces an anti-abuse provision: For those who contribute to their IRA after age 70 ½ and also contribute to a QCD, you cannot make the IRA contribution, then use that money for your qualified charitable deduction.

On inherited IRAs

Under the SECURE Act, non-spouse beneficiaries of an inherited IRA must empty their accounts within 10 years if the account owner passed away on or after January 1, 2020. There are a few exceptions:

• Chronically ill or disabled heirs
• Minors up to the age of majority, or age 26 if the child is still in school
• Heirs no more than 10 years younger than the account owner (such as a sibling or friend of the deceased).

You cannot roll this IRA over to another, and the method in which you disburse funds is entirely up to you, as long as the account balance is zero at the end of 10 years. Keep in mind that the withdrawals will be taxed on top of your normal income rate. If you have any questions, please contact your financial advisor. 

For new parents

Typically, if you take a distribution out of a qualified account before age 59 ½, you get penalized with a 10% tax. However, the SECURE Act is making a change for new parents: each individual (meaning you and your spouse) can take out up to $5000 penalty-free from their IRA or other retirement account, within one year of the birth and/or adoption of a child. 

529 Plans

In the past, 529 plans were used to cover tuition costs in K-12 and post-secondary education, among other benefits. With the passage of the SECURE Act, plan holders can now include apprenticeship programs and related expenses. Additionally, 529 plan funds can be used to pay up to a maximum of $10,000 in student loan debt. 

Talk to us about the SECURE Act

Have questions about the SECURE Act and how it might affect your financial future or your tax return for 2019? A qualified financial advisor at Chatterton and Associates will be happy to address your concerns and give you peace of mind. Contact us today and let us know how we can help.

Sincerely,

The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.