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The SECURE Act: What You Need to Know

By: Scott Thoma, CFA, CFP®, Principal January 22, 2020

If you’ve been following the financial news lately, you may have heard of the SECURE Act. SECURE stands for "Setting Every Community Up for Retirement Enhancement." This law puts into place some big changes primarily affecting retirement accounts, starting this year. What should investors know about this new law?

Traditional IRA contribution age limit eliminated

Previously, you could no longer contribute to a traditional IRA once you reached age 70½. Starting in 2020, you can contribute to this account regardless of your age, as long as you have taxable compensation.

Roth IRAs have never had an age limit for contributions, so in that respect, Roths are not changing. But remember that Roth IRAs do come with income limits to make contributions.

Beginning RMD age increases

Traditional IRA owners are required to take an RMD – but this law is changing the age at which RMDs must begin. Previously, you had to start taking your RMD by April 1 of the year following the year you reached age 70½. Beginning this year, the RMD age increases to 72. But keep in mind that if you started taking RMDs prior to this year, you’ll need to continue taking them going forward.

This RMD age increase also applies to other types of retirement plans, such as a 401(k), a SEP or a SIMPLE.

Changes to the "stretch" IRA option

If you’re inheriting a traditional IRA, 401(k), SEP or SIMPLE from someone other than your spouse, you’ll want to pay attention to the SECURE Act change regarding "stretching" these accounts.

Previously, you could "stretch" distributions from an inherited account over your lifetime, assuming you met the definition of a qualified beneficiary. The new law states that if you’re a non-spouse beneficiary, you’ll need to take all account distributions by the end of the 10th calendar year following the individual’s death. There are some exceptions to this requirement, such as for the disabled or chronically ill, minor children or any other person who is not more than 10 years younger than the account owner. Notably, if you’re already "stretching" an inherited account, you can continue using this strategy.

You also can take penalty-free withdrawals of up to $5,000 from a retirement plan for any qualified birth or adoption expenses.

Since these changes can be complex, be sure to talk to your tax professional and potentially your legal professional about how the SECURE Act might affect your situation and your estate strategy. For example, trusts that were created to take advantage of the old stretch rules should be reviewed with your legal professional.

529 plans and student debt

Previously, you faced a 10% federal tax penalty if you withdrew 529 funds to pay for anything other than qualified expenses. With the SECURE Act, you can now use a lifetime limit of up to $10,000 per 529 plan beneficiary to repay student loans without facing a penalty.

We can help

If you’re unsure about whether the provisions in this law apply to you, talk to your tax professional and potentially your legal professional in addition to your financial advisor. You’ll want to be sure you’re taking advantage of any changes that could be beneficial to your situation.

And don’t hesitate to contact your financial advisor if you have any questions related to your investments or whether you’re on track to reach your financial goals, as our goal is to focus on making your financial goals "SECURE."

Important Information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional. This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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