How the SECURE Act Affects Your Retirement Planning

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by President Donald Trump in December 2019 and became a law as of Jan. 1, 2020. The new legislation brings changes for long-term retirement savings and affects Americans at every age.

What is the SECURE Act?

The SECURE Act changed a variety of retirement account rules, including who is eligible to contribute to retirement accounts and when withdrawals are required. The new legislation also adds a new exception to the early withdrawal penalty.

Important retirement account changes from the SECURE Act include:

— The required minimum distribution age increases to 72, up from 70 1/2.

— The age limit for IRA contributions has been removed.

— Inherited retirement account distributions must now be taken within 10 years.

— New parents can take penalty-free withdrawals.

— Long-term part-time employees will now be eligible for 401(k) plans.

Here’s an in-depth look at the SECURE Act and the new rules to expect from the law.

An Older Required Minimum Distribution Age

Previously, you were required to start taking withdrawals from a traditional IRA by April 1 of the year after you turned age 70 1/2. These withdrawals are known as required minimum distributions. “The SECURE Act pushed that limit to age 72, allowing for IRA owners to defer paying tax on those funds while they, hopefully, keep growing,” says Kyle Whipple, a partner at Custom Wealth Solutions in Plymouth, Michigan.

The new law is effective as of 2020. “If you hit age 70 1/2 in 2019, you will need to take RMDs for 2019 and 2020 even though you don’t turn 72 until 2021,” says Tony Drake, a certified financial planner and founder of Drake & Associates in Waukesha, Wisconsin. “Those who turn age 70 1/2 in 2020 do not have to take their RMDs until age 72.”

[See: How to Pay Less Tax on Retirement Account Withdrawals.]

No More Age Limit for IRA Contributions

Workers with an individual retirement account used to only be able to contribute up until age 70 1/2, but that age limit has now been removed. “The SECURE Act allows you to continue contributing to your IRA at any age as long as you are still working,” Drake says. In 2020, the contribution limit for an IRA is $6,000, or $7,000 if you are 50 or older. If you and your spouse are 71 or older in 2020 and still working, you can contribute up to $7,000 to an IRA in each of your names, or $14,000 total. “This gives you a valuable tax deduction and helps you save more for retirement,” Drake says.

Inherited Retirement Account Distributions Must Be Taken Within 10 Years

Before the new law was in place, those who inherited IRAs could stretch out the withdrawals and required tax payments on each distribution over their life expectancy. Now, for retirement account owners who pass away after Jan. 1, 2020, beneficiaries may be required to withdraw assets in an inherited IRA or 401(k) within 10 years. However, there are a variety of exceptions to the new 10-year rule, including a surviving spouse, minor children, disabled and chronically ill beneficiaries and beneficiaries who are up to 10 years younger than the IRA owner. If you were considering a stretch IRA, it may be worth revisiting your situation under the SECURE Act. “Check your IRA beneficiaries,” says Rhian Horgan, CEO and founder of Kindur, a New York-based financial technology company that helps boomers prepare for retirement. “It may be more beneficial to name your spouse, rather than children, as the beneficiary as they are not subject to the 10-year distribution rules.”

[See: 9 Ways to Avoid 401(k) Fees and Penalties.]

New Parents Can Take Penalty-Free Withdrawals

Prior to the new law, if you took a withdrawal from your IRA or 401(k) before age 59 1/2, the amount would usually be subject to income tax and a 10% penalty. However, the IRS allows penalty-free early distributions from some types of retirement accounts for specific circumstances, such as an expensive medical emergency or to purchase health insurance after a job loss. The SECURE Act adds an additional exception to this list. You are now allowed a $5,000 withdrawal from an IRA or 401(k) after the birth or adoption of a child. You won’t have to pay a penalty for withdrawing the funds, and you can repay the funds as a rollover contribution. “You will pay income tax on the money if it is not repaid to the account,” Drake says.

Long-Term Part-Time Employees Are Now Eligible for 401(k) Plans

The new law provides a way for more part-time workers to be eligible for a 401(k) plan. In the past, part-time employees needed to work at least 1,000 hours during a 12-month period to be able to contribute to a 401(k) plan. Under the SECURE Act, employees who log at least 500 hours in a 12-month period for three consecutive years and are 21 or older can contribute to a 401(k) plan.

[Read: How to Max Out Your 401(k) in 2020]

More 401(k) Options

Many small businesses find it too costly to provide a 401(k) option for their employees. The SECURE Act has provisions to make 401(k) plans a viable option for workers at small firms. “It encourages more small businesses to offer employees a 401(k) by utilizing tax credits to cover some of the cost,” Drake says.

For workers who set aside funds in a 401(k) plan, they’ll find more choices when deciding how to invest their money. “The SECURE Act allows plan providers to include more guaranteed lifetime income options, or annuities, in employer-sponsored 401(k)s,” Drake says.

More from U.S. News

New 401(k) Contribution Limits for 2020

How Much Should You Contribute to a 401(k)?

How to Open a Roth IRA

How the SECURE Act Affects Your Retirement Planning originally appeared on

Update 02/12/20: This story was published on an earlier date and has been updated with new information.

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