The SECURE Act was signed into law on January 1st, 2020. Due to the COVID-19 Pandemic, the CARES Act (economic stimulus bill) was even more recently signed into law on March 27th, 2020 and we have included some of the CARES Act changes to this article as well.
The SECURE Act – short for “Setting Every Community Up for Retirement Enhancement” Act – was signed into law by President Trump ultimately going into effect as of January 1, 2020. The SECURE Act was meant to renew some “outdated” retirement regulations and provide more flexibility to the average consumer and retiree.
The CARES Act – short for “Coronavirus Aid, Relief, and Economic Security” Act – was newly signed into law on March 27th to provide economic stimulus during the global COVID-19 pandemic. We have included some of these new, and temporary, changes to retirement legislation below in bold.
- You can now delay taking required minimum distributions (RMDs) until age 72. If you reached age 70½ on or after January 1, 2020, you can delay taking RMDs until April 1st of the year after you reach age 72 due to SECURE Act changes. An additional delay of one year may also be possible, with further restrictions. The CARES Act has suspended all required minimum distribution payments for 2020 – this one time change to the RMD rules helps to prevent retirees from needing to liquidate stocks/funds from their accounts at larger percentages due to markets being impacted by the COVID-19 pandemic.
- Exception to 10% early distribution penalty. With the SECURE Act, now up to $5,000 can be distributed penalty-free for a qualified birth or adoption. This distribution must occur during a one-year period beginning on either the date of birth or the finalization of adoption of a child under the age of 18. The CARES Act has also provided temporary relief of the 10% early distribution penalty for those needing to withdraw up to $100,000 from retirement accounts prior to age 59 ½ during 2020. You will still need to pay regular income taxes on the distribution, however, you also have 3 years to pay those taxes OR repay the distribution back into your retirement account within the next 3 years.
- 529 Plan funds for K-12 expenses. The SECURE Act changed the allowable expenses for 529 plans to include apprenticeship programs for fees, books, supplies and required equipment. The program must be registered with the Department of Labor to be eligible.
- 529 Plan funds for Student Loans: 529 plans can now be used to pay for student loan debt for the plan beneficiary or sibling of the beneficiary without taxes or penalty. There is a $10,000 lifetime limit for all 529 plans which can be used towards an individual’s student loans due to this SECURE Act change.
- Contributions to IRAs after age 70½. Contributions can be continued so long as the individual receives compensation from either wages or self-employment income, which is a welcome SECURE Act change for many retirement savers.
- Multiple Employer Plans (MEPs) and Tax Credits for Small Business Owners: In order to offer competitive and cost effective retirement plans for small businesses, the SECURE Act introduced Multiple Employer Plans, or MEPs, as a new way for multiple small businesses to pool their resources together to offer a more attractive retirement plan to their employees with larger scale. Additionally, the small business tax credit for starting new retirement plans increased from $500/year to $5,000/year (or $15,000 over the three allowable years). The CARES Act has provided for a number of temporary aid packages for small businesses, through economic injury disaster loans, which can provide needed capital and liquidity during this time of economic uncertainty due to COVID-19. For more information on these programs, please visit www.sba.gov/coronavirus
- New 10-year “stretch” window for inherited retirement accounts. Previously, the stretch window for inherited IRA assets could last for the entire life expectancy of the beneficiary. Under the new SECURE Act rules, a maximum 10-year stretch window applies, but with various exceptions. This means that unless an exception applies, the entire retirement account must be distributed by the end of the tenth year following the retirement account owner’s death. Under the new rule, no annual distributions are required prior to the end the 10-year period (read: no RMDs). The CARES Act has also temporarily suspended all RMD payments for inherited IRA beneficiaries for 2020.
- Increase Annuity Options Inside Retirement Plans. While not inherently a bad change, the SECURE Act eased some of the liability concerns with safe harbor provision inside of 401(k) plans and picking the “best” annuity provider for the plan. The change may increase the opportunity for annuities to be held inside of qualified retirement plans at a larger scale. We would recommend consulting with your financial professional to see if an annuity in your retirement plan is right for you.
Investors should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only form that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan. Limitations and Early Withdrawals. Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.