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How does the SECURE Act affect you?

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). This SECURE Act does several things to modify both retirement savings rules as well as retirement distribution rules.

These changes will affect some of our Financial Coach clients immediately, and many more as we move into the new decade. Below is our effort to provide a layman’s terms and concise outline of some of the key provisions affecting clients:

1. Require Minimum Distributions (RMDs) from 401(k) plans and Traditional IRAs have historically started in the year the account owner turns age 70 1/2 years. The SECURE Act pushes that to age 72, creating approximately one and a half years of continued tax deferred growth of retirement savings before being required to tap into them. This new age rule only applies to those account owners who did NOT yet attain the age of 70-and-1/2 by the end of 2019.

2. No longer any age restrictions on contributions to Traditional IRAs; savers can now continue to put money away into a Traditional IRA after 70 1/2 years of age. The caveat for both Traditional IRA and Roth IRA contributions (there are no age restrictions on Roth IRA contributions) is that the saver must have “earned income” to make a contribution. Retirement Account distributions, Social Security income, and Pension income do not count as earned income for these [Traditional IRA contribution] purposes.

3. “Stretch” IRAs Eliminated. Traditionally, non-spouse IRA beneficiaries were allowed to take distributions from the Inherited IRA based upon the inheriting person’s life expectancy, effectively allowing the heir to stretch the distributions, and in turn the IRA account, for a long period of time. Now, under the new SECURE Act, all funds from an Inherited IRA must be distributed to non-spouse beneficiaries within 10 years of the owner’s death.

Notable Exceptions:

[i] If the beneficiary of the IRA is the account owner’s spouse, the RMDs are still delayed until the end of the year which the deceased IRA owner would have reached age 72 years.

[ii] Distributions over the life expectancy of a non-spouse beneficiary are allowed if the beneficiary is either a minor, chronically ill, disabled, or not more than 10-years in age younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority, at which point the 10-year rule begins taking affect.

It is important to note that existing Inherited IRAs are grandfathered under the previous rules, so beneficiaries of these accounts will still be allowed to spend them down over their lifetime. However, if those beneficiaries die before the complete distribution of the account, the subsequent beneficiaries will be subject to the 10-year limitation.

Several provisions regarding retirement accounts and 401(k) accounts are beyond the scope of this outline. Please see the references below for more information and details regarding the SECURE Act.