How a Little-Known 2019 Law Can Affect Your Retirement Savings


The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law in December 2019, but will the most significant tax legislation since 2006 be a boom or bust for you in retirement?

The reality: probably neither. There are some exciting provisions within the law, some to frown at, and a whole lot of "the ball remains in your court."

In other words, what has and is likely to happen in Washington is not going to be the difference-maker as you prepare for or live in retirement.

Beyond the changes, my biggest takeaway from the new law is the not-so-subtle reminder that tax laws are written in sand, not stone. Today's truth may be tomorrow's fiction.

Let's take a look at several important provisions in the SECURE Act:

Stretch IRA is eliminated. As a financial planner, this was always an exciting proposition. Under the old rules, designated beneficiaries of retirement plans and IRAs were required only to withdraw money out of those retirement accounts based on their life expectancy. This allowed beneficiaries to reap the tax advantages of those plans over what could be decades. The new rules require most beneficiaries to have totally liquidated the account within 10 years.

A few groups of eligible designated beneficiaries can continue using the old stretch rules: surviving spouses, disabled or chronically ill individuals, beneficiaries less than 10 years younger than the original owner, and -- until they reach the age of majority -- the original account owner's minor children.

The new rules are generally applicable for deaths on or after Jan. 1, 2020, and they don't kick in for certain plans, including the government's Thrift Savings Plan, which is governed by old rules until Jan. 1, 2022.

The Required Minimum Distribution start date is now age 72. The tax benefits of IRAs and other retirement accounts don't last forever. Rest assured, Uncle Sam is going to get his. RMD rules require money to be withdrawn from all retirement accounts other than Roth IRAs. The SECURE Act pushes the starting age of those RMDs from 70.5 to 72. The new rule applies to those who turn 70½ after Jan. 1, 2020. This rule has been temporarily modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

You can make lifetime contributions to your IRA. If you still have what the IRS defines as "compensation," you are no longer prohibited from making contributions to a Traditional IRA at age 70½. Keep on saving.

Kiddie Tax reverts to old rules. In a clear example of the sandy nature of tax rules and regulations, the rules regarding taxation of unearned and investment income for those under 18 (or certain students) have changed again. Just a couple of years after the Tax Cuts and Jobs Act called for the income to be taxed at trust rates, the SECURE Act changed the rules back to how they were before the TCJA. This type of income is again taxed at the parents' marginal rate. There may be an opportunity for affected taxpayers to amend prior year returns.

Qualified 529 college savings withdrawals have been expanded. Beginning in 2020, up to $10,000 -- that's a lifetime limit -- can be withdrawn tax-free and used to pay student loans.

It's easier to generate lifetime income. The law includes several provisions that are designed to encourage and make it easier for businesses to set up and maintain employer retirement plans, and for American workers to save for and generate lifetime streams of income in retirement.

Distributions for adoption or childbirth are penalty-free. As you're probably aware, there are numerous situations in which an early withdrawal from an IRA or retirement plan is not hit with an additional 10% tax or penalty. The SECURE Act adds the birth or adoption of a child to the list. In this case, there's a $5,000 exception per child.

While it may not make your retirement a whole lot more secure, the SECURE Act should certainly provide the necessary motivation to revisit your plans for retirement and talk with your estate planner and tax adviser to ensure your plan makes sense in the context of this year's set of new rules.

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