Will the SECURE Act affect your tax approach?

You’ve likely heard about the Setting Every Community Up for Retirement Enhancement Act, the most significant package of changes to the private retirement system since the 2006 Pension Protection Act (PPA). Known as the “SECURE” Act, the new retirement law impacts IRAs, workplace retirement plans like the UC Retirement Savings Program (403(b), 457(b) and DC Plans) and 529 education accounts.

If you have one or more of these accounts, the law may also affect the way you plan for taxes.  

Here are five key tax-impacting changes to consider from the SECURE Act.

1. The required age to begin taking Minimum Required Distributions (MRDs) is now age 72.

Before 2020, the requirement to begin taking MRDs from IRAs and retirement plans was age 70.5. The new law allows individuals turning 70.5 in 2020 and beyond to wait a bit longer—until age 72—before taking MRDs. Please speak with your tax advisor regarding the impact of this change on future MRDs.

2. Inherited assets are now generally subject to a 10-year distribution period.

Prior to January 1, 2020, beneficiaries of inherited assets (from an IRA or retirement plan) could “stretch” or draw down those assets over their lifetime. The SECURE Act shortened the length of time beneficiaries can stretch distributions to, in general, 10 years after the original account holder passes away. Note: This provision is effective January 1, 2020 for inherited assets from an IRA. It does not go into effect for public employer plans, including the University of California 403b, 457b and DC Plan, until January 1, 2022; therefore, the stretch provision continues for beneficiaries of people who pass away prior to January 1, 2022.

There are several exceptions to the law’s new 10-year requirement, including if the beneficiary is a surviving spouse, minor child, chronically ill or disabled individual, or if the beneficiary is less than 10 years younger than the original account who passed away. Additionally, the SECURE Act’s new 10-year rule does not apply to anyone who inherited assets prior to 2020.

3. Older workers can keep contributing to an IRA regardless of their age.

Before 2020, individuals who reached age 70.5 were prohibited from contributing to an IRA. Under the act, you can continue to contribute to your traditional IRA past age 70.5 as long as you are still working. That means the rules for traditional IRAs will align more closely with Roth IRAs and workplace savings plans like the UC Retirement Savings Program.

4. 529 plans can now be used for apprenticeship programs and student loan repayments.

Following the SECURE Act’s enactment, 529 funds can be used to pay for qualified expenses related to certain apprenticeship programs with tax-free distributions. Additionally, 529 funds can be withdrawn tax-free (up to $10,000) to pay the principal or interest on a qualified education loan. The SECURE Act made both changes retroactive, so any 529 distributions for apprenticeship programs or student loans made after December 31, 2018, are tax free under the new law.

5. Graduate students can now contribute to an IRA with money from stipends and non-tuition fellowship payments.

Before 2020, stipends and non-tuition fellowship payments did not qualify as income under retirement saving rules. Under the act, taxable stipends and non-tuition fellowship dollars will be considered income, allowing graduate and post-doctoral students to contribute these dollars to an IRA.