Secure Act
Ryan Bayonnet, CFP®

Ryan Bayonnet, CFP®

Ryan is a Certified Financial Planner® and the founder of Hyland Financial Planning

How Does the Passing of the SECURE Act Affect Your Retirement?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a bipartisan bill designed to address Americans’ difficulty in saving and investing for retirement. The bill passed the House of Representatives in a 417-3 vote in July and the Senate in a 71-23 vote in December.  The President signed the SECURE Act into law last Friday as part of the government’s overall spending bill.  The bill seeks to put into place provisions to strengthen retirement security across the country.  Listed below are some of the major changes and how they may affect your retirement plan.

Increase Required Minimum Distribution (RMD) Ages

The SECURE Act raises the age that triggers RMDs from 70½ to 72.  This means you can let your retirement funds grow an extra 1½ years before being required to withdraw funds from these accounts. That can result in a significant boost to overall retirement savings for many seniors as it will allow retirees to defer paying taxes on these funds until a later date.

If you continue to work past age 70½, RMDs from your current employer’s 401(k) aren’t required until after you leave your job, unless you own at least 5% of the company.

Removal of Age Limitation on IRA Contributions

The maximum age limit on contributing to a Traditional IRA account was formerly capped at age 70½.  Americans are now working and living longer than before.  To combat this, the SECURE Act will remove that cap for working over the age 70½.  Now you can continue to put away money in a traditional IRA if you work into your 70s and beyond.  As before, there are no age restrictions on contributions to Roth IRA accounts.

Removal of “Stretch” Inherited IRA Provisions

The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own timeframe.  Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death.

There are some exceptions to the rule. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in. If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until the end of the year that the deceased IRA owner would have reached age 72.

Penalty-Free Distributions for Birth of Child or Adoption

If you have a 401(k), IRA or other retirement account, the new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. (You’ll still owe income tax on the distribution, though, unless you repay the funds.) If you’re married, each spouse can withdraw $5,000 from his or her own account, penalty-free. Although using retirement funds for childbirth or adoption expenses reduces the amount of money available in retirement, lawmakers hope this new option will encourage younger workers to start funding 401(k)s and IRAs earlier.

Increase Small Employer Access to Retirement Plans

The SECURE Act has three provisions designed to help small businesses offer retirement plans for their employees. 

  1. The new law increases the tax credit available for a small business’s retirement plan start-up costs. The credit was previously limited to $500 per year and has now been increased to $5,000.
  2. An additional $500 tax credit is created for 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit described above. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible. Automatic enrollment has seen great success in increasing plan participation by employees.
  3. Lastly, the new law allows unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it. This provision allows unrelated small businesses to leverage economies of scale to reduce administrative costs.

Increase Annuity Options Inside Retirement Plans

The new retirement law makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks. These annuities are now portable, too. So, if you leave your job you can roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees. Today, many 401(k)s stay away from annuities, in part because of concerns about liability in picking an annuity provider for the plan. The new rules would essentially ease this liability concern to some degree, potentially opening the path for more annuities to be offered inside of retirement plans.

401(k)s for Part-Time Employees

Previously, employees who haven’t worked at least 1,000 hours during the year aren’t allowed to participate in their employer’s 401(k) plan. Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period.

Graduate Students and Care Providers Can Save More

Currently, contributions to a retirement account cannot exceed the amount of your income.  So, if you receive no compensation, you can’t make retirement account contributions.  Under previous law, graduate and postdoctoral students who receive stipends aren’t allowed to treat those as compensation and therefore cannot contribute to retirement accounts. Similar rules and results apply to payments that foster-care providers receive through state programs to care for disabled people in the caregiver’s home.

Lastly, one is now allowed to take penalty-free withdrawals of up to $10,000 from 529 education-savings plans for the repayment of certain student loans.  Previously, parents and students were only allowed to use 529 education-savings account for tuition.

If you have any questions regarding how the SECURE Act affects your personal investment portfolio, reach out to Hyland Financial Planning.


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