How will Secure Act changes affect you?

The new legislation seeks to improve Americans’ retirement security. The Setting Every Community Up for Retirement Enhancement (Secure) Act, which was passed on Dec. 20, 2019 as part of a $1.4 trillion spending package, represents the most sweeping set of changes to retirement legislation in more than a decade. Though the primary thrust of the new legislation is to encourage and facilitate saving for retirement, there are also provisions designed to give students and their parents more financial flexibility.

Here is a summary of the five key Secure Act changes:

1. Required minimum distributions have been delayed.

Previously, IRA owners were required to begin withdrawing funds from their account(s) by April 1 following the year in which they turned 70½. Under the new rules, those who turn 70½ on or after Jan. 1, 2020 are not required to begin making required minimum distributions until April 1 following the year in which they turn age 72. This provision seems to be a nod to increasing life expectancies and the fact that more Americans are working beyond traditional retirement age. What’s the benefit? If you don’t need to take money out of your IRA, you can now wait an additional 18 months before making mandatory taxable withdrawals.

2. IRA contributions can be made by anyone with earned income.

Individuals with earned income may now make contributions to a Traditional IRA at any age. The Act eliminates the prior age limit of 70½ for contributions. Once again, this change is likely influenced by the fact that, according to the Census Bureau, almost 15 percent of people in their 70s are still working on at least a part-time basis. This gives those individuals additional opportunities to save for their eventual retirement. 3. Inherited IRAs have more restrictions.

If there’s a provision in the Act that’s less than investor-friendly, it’s the curtailing of what has long been known as the “Stretch IRA.” Previously, all individuals who inherited an IRA, TSP or 401(k) account could “stretch” their distributions from the account over their lifetime. Now most non-spouse individuals who inherit a retirement account are required to liquidate it – and pay any applicable taxes — within 10 years.

4. 529 plans can be accessed for student loan relief. The definition of a tax-free or qualified distribution from a 529 college savings plan has been expanded to include repayment of up to $10,000 in qualified student loans and expenses for some apprenticeship pro

grams. This change is retroactive to distributions made after December 31, 2018.

5. IRAs can be used to supplement the cost of having or adopting a child.

Penalty-free withdrawals of up to $5,000 may now be made from retirement plan and IRA accounts during the one-year period from when from when an eligible child of the account owner is born or the date when the legal adoption of an eligible adoptee of the account owner is finalized. You should only consider this option if you do not have savings adequate to fully fund the birth or adoption of your child, but if it is necessary, you can repay this “loan” by making a rollover contribution to an eligible defined contribution plan or IRA.

There are a couple of additional provisions in the Act worth noting.

Until now, if you worked less than 1,000 hour per year, you were generally ineligible to participate in your company’s 401(k) plan. The new law requires employers maintaining a 401(k) plan to offer it to any employee who works more than 1,000 hours in one year, or 500 hours over three consecutive years. This means that long-term, part-time workers will be able to participate in their company’s 401(k) plan.

Finally, the Secure Act makes it easier for small-business owners to offer retirement plans to their employees by allowing them to join a multiple employer plan, which will be available in 2021. These “open plans” have the potential to deliver low-cost, high-quality retirement plans for millions of small business workers. This provision addresses the fact that roughly half of private sector workers in the U.S. don’t have access to retirement plan through their employer today.

How will the Secure Act changes affect you and your financial plan?

That depends on your circumstances and objectives. But there’s a good chance that at least one or two of these changes will require adjustments in your plan, now or in the future. First Command Financial Advisors are well-versed in the legislation and can help you make the most of these changes.

Geoffrey Concessio is a financial advisor with First Command Financial Services. Contact him at rgconcessio@firstcommand.com