What The SECURE Act Means for Your IRA?

Tax law changes are nothing new, but in 2019, when the SECURE Act became law, it significantly changed some standard practices for retirement accounts, parents and business owners. With adjustments that impact both contributions and distributions to IRAs, the Act will likely be a game-changer for many retirement savers. Let’s look at a quick breakdown: 

1. Change in age for IRA required minimum distributions (RMDs)

If you have a Traditional IRA, you must take taxable distributions at some point in your retirement. That age was 70.5, but with the passing of the SECURE Act, it’s now 72. This is generally good news because it means that you can hold, trade and invest savings longer, accumulate more tax-deferred growth, and possibly hit an even lower tax bracket when you start taking distributions. 

2. Removal of the age limit for IRA contributions 

In the past, Traditional IRA owners could no longer contribute to their account by age 70.5. Now, there is no age limit for making contributions as long as the IRA holder is still employed. This gives investors much more time to save for retirement and enjoy a tax break for doing so.

3. Nonspouse IRA beneficiaries must take funds within ten years

Before the act was passed, nonspouse IRA beneficiaries could stretch out their distributions, potentially leaving unused funds to their children. Now they will need to withdraw inherited IRA funds within ten years of the original owner’s death.  One way to offset the cost of taxes on these distributions may be to open an IRA of your own. 

4. Certain parental withdrawals are permissible

New parents might be able to take a penalty-free withdrawal of up to $5,000 (per parent) from a retirement account within 12 months after giving birth or adopting a child to cover child-related expenses. Parents might also qualify to take as much as $10,000 from a 529 for student loan repayment. While these withdrawals would not be subject to penalties, they may  still be taxable. 

5. Part-time employees can participate in 401(k)s

Part-time employees who have consecutively worked from 500 to 999 hours for a single employer over more than three years may now be permitted to participate in the employer's 401(k) plan. Employers may require additional hours worked before qualifying for matching employer contributions.

Business owners have also seen a few changes thanks to the act, including:

• Tax credits for small businesses (100 or fewer employees) starting a 401(k): Get up to $5,000 in tax credits when your 401(k) includes non-highly compensated employees and automatic enrollment.

It’s a lot to absorb, so here’s a list of key takeaways to help break it down:

• Do you have an IRA? Now you can contribute as long as you remain working. Also, you don’t need to take required minimum distributions until you’re 72. 

• Have you inherited an IRA? If you are a nonspouse beneficiary, you’ll need to take the funds out of the IRA within ten years after the death of the original owner.

• Are you a parent? You might be able to take an early, penalty-free withdrawal of up to $5,000 to pay for expenses within a year of the birth or adoption. Parents of older children haven’t been left out, as they may take a penalty-free withdrawal of up to $10,000 to repay student loans.

• Do you work part-time? You may now be able to take part in your employer’s 401(k) if you’ve worked at least 500-999 hours over three consecutive years.

• Are you a small business owner? You could qualify for tax credits when you set up automatic enrollment in a 401(k) covering non-highly paid workers.