The SECURE Act Explained

There have been many articles written about the new law which the President recently signed which will affect many retirement plans. For that reason the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) will affect many of us.

I will set forth some of the more important elements of the law. These items will have the most impact on individuals. There may be tax savings opportunities, but not all the changes are favorable. It is a good time to visit your accountant, CPA or your financial planner to review your retirement plan and how the new law will impact you and your family.

First, before the SECURE Act, traditional IRA contributions were not allowed after the individual reached the age of 70 1⁄2. Beginning this year, an individual of any age may make contributions to a traditional IRA for as long as the individual receives compensation, which is usually earned income from wages or self-employment.

Second, before the SECURE Act, retirement plan participants and IRA owners were usually required to start taking the required minimum distributions (RMDs) from their plan by April 1 of the year following the year they reach the age of 70 1⁄2. Because of increases in life expectancy, the new law provides the age at which individuals must begin taking distributions is increased to 72 years of age.

Third, beneficiaries, both spousal and nonspousal, were generally permitted to stretch the tax-deferral advantages over the life or life expectancy of the beneficiary in the IRA context.
This is called a “Stretch IRA.” Starting this year, a nonspousal beneficiary is required to take distributionswithintenyearsfollowingtheplan’sparticipant’sorIRAowner’sdeath. Stretch IRAs will no longer be available for those beneficiaries and the Ten-Year Rule will now govern. Exceptions to the Ten-Year Rule are: 1) the surviving spouse; 2) a minor child of the plan participant or IRA owner; 3) a chronically ill individual and 4) any other individuals who are not more than ten years younger than the plan participant or IRA owner. Those exceptions to the Ten-YearRulewillbeabletotakethedistributionsovertheirlifeexpectancy. Notethatwhena minor child reaches majority, the Ten-Year Rule will apply.

Fourth, Section 529 education savings plans may pay for the expenses of registered apprenticeships or student loan repayments.

Fifth, money may be taken from your retirement plan up to $5000 penalty free provided the funds are used to pay expenses related to the birth or adoption of a child. The amount of the penalty-free distribution applies to both husband and wife for a total of $10,000 penalty-free distribution.

In sum, there are many favorable changes to the law concerning our retirement plans. Please talk to your estate planning attorney, accountant or wealth manager about how the new laws will affect you.

Happy New Year!