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The new SECURE Act provides greater retirement savings flexibility for both individuals and businesses. The new law, which was approved by Congress at the close of 2019, includes a total of 29 provisions, most of which are related to tax-advantaged savings plans.

Most of the provisions of the SECURE Act (which stands for “Setting Every Community up for Retirement Enhancement”) went into effect at the beginning of 2020, although some will take effect later.

One focus of the new act was to provide greater flexibility for Americans who are working well beyond the traditional mid-60s retirement age. Several of those provisions could have a significant impact on millions of investors.

Here are some of the key provisions:

Extends age for required minimum distributions (RMD). The law gives individuals an extra 18 months before they are required to take distributions from their traditional Individual Retirement Account (IRA) or 401(k) or similar retirement savings plans. Individuals had been required to take distributions the year they turned 70½. Under the new law, they may wait until the year they turn 72 to begin taking distributions. However, the new provision does not apply to individuals who turned 70½ in 2019. Roth IRAs have no such RMD rule, and account holders may put off distributions from their account for as long as they wish.

Eliminates age limit for traditional IRA contributions. Individuals had been prohibited from contributing to a traditional IRA after reaching the age of 70½ — even if they were still working. The new law repeals that provision, allowing working individuals to continue to contribute to their IRA for as long as they have earned income. The provision applies to contributions that are made for taxable years after December 31, 2019. The law does not affect Roth IRAs, which have no age restrictions for contributions.

These two provisions combined – requiring distributions beginning at age 72 and eliminating the age limit for contributions – means some account holders may be contributing money to their IRA while simultaneously pulling money (RMDs) out of their IRA.

Increases charitable contribution qualification. The provision reduces the amount of qualified charitable distributions that would be excluded from income for those making deductible contributions to their traditional IRA after 70½. This provision does not apply to distributions for the 2019 tax year.

Modifies stretch RMD rules for successors. The new law stipulates that all money in an IRA or defined contribution plan must be distributed within 10 calendar years after the death of the account holder, unless the successor qualifies as an “eligible designated beneficiary.” That would include the surviving spouse, disabled or chronically ill individuals, children of the account owner who have not reached the age of majority, or beneficiaries who are less than 10 years younger than the account holder. Previously, all beneficiaries could stretch their RMDs over their lifetime.

Allows small companies to combine plans. The act gives small companies the right to ban together to offer more efficient pension plans to their employees. Through the “multiple employer plans” provision, small companies can tie their plans together to obtain more efficient, less expensive management services and, potentially, more comprehensive pension investment plans for their employees.

Includes grad student stipends as income. Graduate and post-graduate students are now allowed to include non-tuition fellowship payments and other stipends as income in setting the amount of money they can contribute to an IRA.

Allows penalty-free withdrawals for birth or adoption. New parents can now withdraw up to $5,000 from their IRA without a penalty. The new rule applies to both new births and adoptions, and the withdrawal must be made within one year after the birth or adoption date. The distribution may be treated as a rollover and may be resubmitted to an eligible retirement plan or IRA.

Expands 529 plan uses. Students may now use money from their 529 education savings account to cover costs associated with qualified apprenticeships and up to $10,000 of qualified student loan repayments (including for their siblings).

The SECURE Act also includes provisions designed to improve annuity options within a retirement plan, to make it easier for part-time employees and home healthcare workers to contribute to a plan, and to incentivize smaller businesses to encourage employee participation in automatic retirement contribution plans.

This article provides an initial overview of some of the key changes outlined in the Act. A number of these provisions will be subject to interpretations from the Internal Revenue Service or other authorities.  This information should not be considered tax advice and is not intended as a source for legal, accounting or tax advice or services.   Please consult your attorney and/or tax professional regarding your personal situation.

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