Congress passed – and former President Trump signed into law – the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions went into effect in 2020.
Here is a look at some of the elements of the Act.
1. Repeal of the maximum age for traditional IRA contributions – Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.
2. Required minimum distribution age raised from 70½ to 72 – Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½.
For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
3. Partial elimination of stretch IRAs – For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within 10 years following the plan participant’s or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than 10 years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
4. Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans – Before 2019, qualified higher education expenses didn’t include the expenses of registered apprenticeships or student loan repayments.
But for distributions from 529 plans made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.