Enacted with the goal of making it easier for American workers to save for retirement, the SECURE Act—which stands for Setting Every Community Up for Retirement Enhancement—implemented several sweeping changes to retirement plans when it became law on January 1, 2020. From expanding the tax credits available to businesses that offer retirement plans to enhancing flexibility in the rules regarding when you must take distributions from your retirement savings, the SECURE Act will likely have an impact on most employers and employees.

If you have a retirement savings plan or may contribute to one in the future, here are some of the most important SECURE Act provisions that could affect you:

  • Removal of age limits for IRA contributions. Individuals of any age may now continue making contributions to their IRAs as long as they have earned income. This provision was designed to help older workers continue growing their retirement savings, as previous law prohibited contributions after age 70 1/2.
  • Access to 401(k) plans for part-time employees. The “gig economy” has grown exponentially in recent years, and many workers now hold part-time positions with one or more employers. Previously, employees needed to work at least 1,000 hours during a year to be eligible to participate in their employer’s 401(k) plan. To help these individuals save for retirement, the SECURE Act now requires companies to allow part-time workers aged 21 or older to participate in company 401(k) plans, as long as they have worked at least 500 hours in a 12-month period in each of three consecutive years.
  • Penalty-free early withdrawals for new parents. Previously, if you took a withdrawal from your 401(k) or IRA before age 59 1/2, the amount would have been subject to income tax and a 10 percent penalty—unless you qualified for a specific exception enumerated by the IRS, such as having emergency medical costs. The SECURE Act added a new exception to the list: you may now withdraw up to $5,000 from a 401(k) or IRA following the birth or adoption of a child. While you won’t be penalized for such a withdrawal, you would have to pay income tax on the amount unless it is repaid to your account.
  • Plan providers must issue annual statements. The new law requires the providers of defined contribution plans, such as IRAs, to issue account owners annual statements that contain estimates of potential monthly earnings that the person could receive if they were to purchase a joint, survivor, or single-life annuity. This requirement will not take effect until one year after the Department of Labor publishes interim final rules and model disclosures as directed by the law.
  • Expansion of qualified education expenses under 529 plans. Originally created as a flexible, tax-advantageous way to help families pay for post-secondary education, 529 plans are funded with after-tax dollars and may continue to grow tax-free as long as any withdrawals are used for qualified education expenses. To alleviate the common pitfall of ending up with excess funds in the account after the beneficiaries have finished their schooling, the SECURE Act expands the definition of qualified expenses to allow 529 plans to be used for student loan payments and the costs associated with apprenticeship programs.

To learn more about other significant provisions of the SECURE Act, please see our recent blogs on the changes to required minimum distributions, new and expanded tax credits for businesses that offer retirement plans, and changes to the stretch IRA. Wondering how this sweeping new law may impact your retirement? Contact us today to schedule a consultation!

-Stephanie Vance, J.D.

(Sources: https://www.kiplinger.com/article/retirement/T037-C032-S014-secure-act-basics-what-everyone-should-know.html, https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act).