Pandemic Overshadowed Landmark Legislation

In December 2019, President Donald Trump signed a new piece of legislation into law: the Secure Act or the Setting Every Community Up for Retirement Enhancement Act. Some pundits say there hasn’t been retirement legislation this meaningful since the Pension Reform Act of 2006. Unfortunately, due to COVID-19 rearing its ugly head shortly after the law went into effect, the SECURE Act did not receive the attention it deserved in 2020.

It’s understandable that living through a pandemic might have distracted you from learning more about the SECURE Act when it first passed, but it’s truly worth taking some time to explore now. Let me tell you about the seven most important things you need to know about this legislation.

 

1. It Changed Required Minimum Distributions (RMD)

Before the SECURE Act, retirees had to withdraw funds each year from their retirement accounts starting at age70-1/2. These mandatory withdrawals are called required minimum distributions or RMDs. With the new act in place, retirees can now wait to make required withdrawals until age 72. This allows individuals to keep their funds growing tax-deferred for a few more years, which can be helpful in keeping your taxable income as low as possible, especially if the funds are not needed until later in your retirement. 

 

2. You Can Contribute to an IRA for a Longer Period of Time

In the past, you had to stop making contributions to your individual retirement account once you reached age 70-1/2. With the SECURE Act, you can continue your IRA contributions for as long as you remain employed. This can be a great benefit to savers who started planning for retirement late or retirees who need to continue taking advantage of the tax deferral that IRAs provide. 

 

3. Part-Time Workers Can Receive More Benefits

Typically, an individual needs to work as a full-time employee to receive benefits like access to a retirement plan from an employer. The SECURE Act changed that. Part-time employees who work over 500 hours annually for three consecutive years, or 1,000 hours in one year, are now eligible to participate in a company-sponsored 401(k) plan.

 

4. Enjoy Broader Use of 529 Plans 

As Congress continues to fight it out over what to do with America’s student loan debt crisis, the SECURE Act may provide some relief to borrowers struggling to repay what they owe. An individual can now use up to $10,000 of their 529 plan funds to pay off student debt for themselves or for the beneficiary of the plan. The act also expanded the definition of “qualified expenses,” which is what 529 plan funds must be used for in order to avoid penalties. These now include costs for apprenticeship programs registered with the Department of Labor, like books, classes and supplies.

 

5. Adoptive Parents Get More Flexibility With Retirement Funds

The SECURE Act allows parents who adopt a child to withdraw up to $5,000 penalty-free from their retirement plan. Each parent is allowed to make this withdrawal, allowing a couple to pull a combined total of $10,000 from retirement accounts. If your employer allows, you maybe able to replace the funds by completing a rollover contribution from a prior 401(k) or rollover IRA. Before doing this, confirm that either the employer or plan administrator will apply the funds as a replacement due to the adoption.

 

6. Your Employer Can Automatically Enroll You in the Company’s Retirement Plan

This provision could help procrastinators who mean to participate in their employer’s retirement plan, but just never get around to it. Should an employee fail or elect not to sign up for their company 401(k), his or her employer can automatically enroll the employee. Prior to the Secure Act, an employer could elect to defer up to 10% of an employee’s salary. The new legislation increased this percentage by 50% and employers can now defer up to 15% of an employee’s salary.

 

7. The Rules for Inherited “Stretch” IRA Withdrawals Changed

A lot of the changes in the SECURE Act focused on helping out the average American. The rule change to inherited IRAs is a bit of an exception, with some arguing that it benefits Uncle Sam more than regular citizens. If you inherited an IRA or 401(k) under the old rules, you could spread your IRA distributions over your estimated life expectancy. Now, beneficiaries must withdraw the inherited assets within 10 years of the account owner’s death. Exceptions to this new rule include a spousal beneficiary, a minor child, a disabled or chronically ill beneficiary, and a beneficiary who is less than 10 years younger than the original IRA or 401(k) account owner. With the IRS forcing beneficiaries to withdraw funds over a 10-year period, this accelerates the time frame that Uncle Sam will be able to access taxes on those funds. Remember, any funds withdrawn from these accounts are taxed at ordinary income rates.

 

What’s Ahead?

Changes like these are exactly what Congress and the IRS will be focusing on in the years to come as the U.S. looks ahead after two crippling recessions in a little more than 10 years. The government may continue to seek strategies to mitigate the amount of debt that’s built as lawmakers have tried to find ways to deal with various crises. But hopefully, they’ll continue to do so with an eye to helping the average American, as much of the SECURE Act aims to do. 

This article was originally published in the March 2021 issue of BetterInvesting Magazine.

Malik S. Lee, CFP, CAP, APMA, is Managing Principal of Felton & Peel Wealth Management; his mission is to bring positive change to the way financial advice and literacy are delivered.

As a CERTIFIED FINANCIAL PLANNER™, He believes in and advocates for adhering to the fiduciary standard when partnering with clients. He’s proud to utilize His nearly two decades’ worth of experience and expertise to help change people’s financial lives for the better.

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