The SECURE (Setting Every Community Up for Retirement Enhancement) Act includes several provisions that benefit retirees and retirement savers, as well as parents and college students. But these potential new benefits could come at a cost to some taxpayers. Here are seven key changes—and what they could mean for you.
No. 1: RMDs kick in at 72
IRS-mandated required minimum distributions (RMDs) from tax-deferred retirement accounts now begin at 72 for anyone who turns 70½ after December 31, 2019.
The fine print: If you turned 70½ in 2019, the old law still applies and you must take your first RMD by April 1, 2020. If you turned 70½ before 2019, you must continue to take your RMDs by the end of each calendar year. Failure to take RMDs on time results in a 50% penalty on the portion not withdrawn.
No. 2: IRA contributions aren’t restricted by age
Contributions to traditional IRAs are now permitted no matter your age, so long as you have earned income.
The fine print: Whether you’re working or not, you’ll still be subject to RMDs at either 70½ or 72 (see “RMDs,” above).
No. 3: Inherited IRAs must be depleted within a decade
Other than a spouse, a minor child, and certain other “eligible designated beneficiaries,” inheritors of retirement accounts must now deplete those assets within 10 years.
The fine print: The new withdrawal schedule could generate significant taxable income for inheritors, potentially pushing them into a higher tax bracket. If assets remain after 10 years, inheritors face a penalty equal to 50% of the undistributed amount.
No. 4: 401(k)s are available to more part-time workers
Employers are now required to offer their 401(k)s or other workplace retirement plans to employees with three consecutive years of service of at least 500 hours per year in addition to employees with more than 1,000 hours of service within a 12-month period.
The fine print: Newly qualified part-time employees can save money on a pretax basis—and capture the employer match, if offered—once they’ve accrued the requisite work history starting in 2021.
No. 5: 529s can be used to pay back student loans
Account owners can now use up to $10,000 from a 529 college savings account to repay student loans—so long as it’s for the account’s primary beneficiary or the beneficiary’s siblings or stepsiblings.
The fine print: Those with excess 529 assets now have another penalty-free way to use them—though such funds should be used to pay the beneficiary’s college tuition first, all things being equal.
No. 6: Retirement savings can be used for adoption and birth costs
Account owners can now withdraw up to $5,000 from a 401(k) or an IRA to pay for qualified adoption or birth expenses without penalty.
The fine print: Parents may be able to avoid taking on debt to cover such expenses; however, tapping retirement funds early could put your long-term savings goals at risk.
No. 7: Late tax returns trigger a bigger fine
If your tax return is 60 or more days late, you will now incur a penalty of the lesser of $400 or 100% of taxes owed.
The fine print: Although the new penalty is at most only $200 more than the previous one, every dollar you lose to penalties is one you can’t invest for future growth.
Source: The United States Congress, 12/20/2019. Note: This is not a complete list of changes resulting from the SECURE Act. See H.R. 1865 for full details.
