New Rules for Retirement

new rules for retirement

The SECURE Act of 2019 made many changes to how you save money for retirement; how you use your money in retirement; and how you can better use your Section 529 plans. Whether you are age 35 or age 75, these changes affect you and can help you to avoid outliving your assets. Take a look at new changes that can help you proactively save toward retirement.

Small-Employer Automatic Contribution Tax Credit

If your business has a 401(k) plan or a SIMPLE (Savings Incentive Match Plan for Employees) plan that covers 100 or fewer employees, and it implements an automatic contribution arrangement for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution.

IRA Contributions for Graduate and Postdoctoral Students

Before the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not treated as compensation for IRA purposes. Thus, they could not be used as a basis for IRA contributions. The “compensation” obstacle has since been removed. “Compensation” is now defined as any amount paid to the individual to aid in the pursuit of graduate or postdoctoral study.” This enables students to begin saving for retirement and accumulating tax-favored retirement savings.

No Age Limit on Traditional IRA Contributions

The prior law stopped you from contributing funds to a traditional IRA if you were age 70½ or older. Now you can make a traditional IRA contribution at any age, just as you could and still can with a Roth IRA.

No 10% Penalty for Birth/Adoption Withdrawals

There is no penalty for early withdrawal on an IRA or qualified retirement plan distributions if the distribution is a “qualified birth or adoption distribution.” The maximum penalty-free distribution is $5,000 per individual per birth or adoption.

Required Minimum Deductions Begin at Age 72

Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70½. Now you can wait until the tax year you turn age 72.

Open a Retirement Plan Later

Under the SECURE Act, if you adopt a stock bonus, pension, profit-sharing, or annuity plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year. Under prior law, you had to establish the plan before the end of the tax year to make contributions for that tax year.

Expanded Tax-Free Section 529 Plan Distributions

Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are investments into the plan (your basis), or used for qualified higher education expenses, which now include fees, books, supplies, and equipment required and principal or interest payments on any qualified education loan of the designated beneficiary or his or her siblings. If you rely on the student loan provision to make tax-free Section 529 plan distributions, there is a $10,000 maximum per individual loan holder, and the loan holder reduces his or her student loan interest deduction by the distributions, but not below $0.

This change applies to distributions made after December 31, 2018. You can use the new qualified expense categories to identify tax-free Section 529 distributions that are retroactive to 2019.

Required Minimum Distributions (RMDs) on Inherited Accounts

Under the old rules for inherited retirement accounts, you could “stretch” out the account and take RMDs each year to deplete the account over many years. Now, if you inherit a defined contribution plan or an IRA, you must fully distribute the balances of these plans by the end of the 10th calendar year following the year of death.