Biggest Takeaways from the Newly-Enacted SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump on December 20, 2019. It is intended to improve our country’s retirement savings crisis. As most of us are aware, one-in-five Americans have no retirement savings at all according to a 2018 study by Northwestern Mutual.
Stretch IRAs are gone for most people: A Stretch IRA previously permitted non-spouse beneficiaries of IRAs to spread disbursements of inherited money over their own lifetime. An IRA inheritance must now be distributed within ten years of the death of the original account owner. Exceptions include: assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the deceased account owner. This change alone is estimated to raise over 15 ½ billion dollars to fund the remaining modifications to the law.
Kiddie tax: Repealed unfavorable rates on investment income collected by children and young adults. Reinstated the pre-TCJA (Tax Cuts and Jobs Act) kiddie tax calculation where some of the child’s income is taxed at the parent’s marginal rate.
Long-term, part-time employees: Now allowed to participate in 401(k) plans! Up until now, if you worked less than 1,000 hours per year, you were generally ineligible to participate in your company’s 401(k) plan. Exception: collectively bargained plans.
Age limit on Traditional IRA contributions: Gone (used to be capped at age 70 ½). You can now continue to contribute to your traditional IRA as long as you report earned income on your tax return.
Repaying a student loan: 529 account owners can now take penalty-free withdrawals of up to $10,000 for the repayment of certain student loans. No double-dipping so any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. Also under the new law, a 529 plan may be used to pay for certain apprenticeship programs.
Qualified tuition deduction: The deduction for up to $4,000 in qualified tuition and fees is available again. You don’t have to itemize to benefit here, as it’s an above-the-line deduction.
Birth or adoption: Parents can take a penalty-free withdrawal of up to $5,000 from retirement plans for the birth or adoption of a child to cover qualified expenses. Income tax will be due on the withdrawal.
Required Minimum Distribution (RMD): Raised the required withdrawal age from 70 ½ to 72.
Small businesses owners: Incentivized to offer their employees a retirement plan by obtaining tax credits and new protections on group retirement plans.
Family members of deceased veterans, first responders and members of Native American tribes: Fixed an error established by recent tax cuts that unintentionally increased the tax burdens of Americans collecting benefits connected to family members killed in the line of duty, as well as the tax burdens of inheritors of wealth in certain Native American groups.