The law addresses some old provisions regarding retirement plans
Required Minimum Distributions
Older Americans were required to start taking required minimum distributions (RMDs) from their retirement plans at age 70 and a half. “Required” is the key word here; they had to begin withdrawing their money whether they needed it or not. These distributions represent the minimum amount that must be withdrawn from their plans each year.
Retirees have always had the right to withdraw more than the minimum, but before the SECURE Act, they had to take the minimum required amount and add it to their taxable income.
The SECURE Act pushed this age to 72. The age 70 and a half rule has been in place since the 1960s and has never been adjusted to accommodate the fact that Americans are living longer. This rule prevented older adults from passing money to heirs without touching the money or paying taxes on it.
The SECURE Act includes some safety measures. Some beneficiaries now must start taking their RMDs from inherited accounts within 10 years of the account holder’s death. Previously, they could stretch distributions over their own life expectancy as a tax-deferral measure.
Provisions for Growing Families
Many withdrawals from retirement plans were subject to a 10% tax penalty when taken before age 59 and a half, although there were some exceptions depending on what was done with the money.
The SECURE Act adds another exception: parents who give birth or adopt a child can take up to $5,000 in the year following the event. The money must be used for “qualified birth or adoption expenses.”
Distributions are still subject to regular taxes, but they can be repaid to a retirement account later.
Part-time Workers Can Join 401(k) Plans
Part-time workers, who work less than 1,000 hours a year, were unable to contribute to most 401(k) plans through their private employers. The SECURE Act changes this. Employees only need to work more than 1,000 hours in a single year to contribute, or 500 hours in three consecutive years.
Plans covered by a collective bargaining agreement are an exception to this new rule, and employees must be at least 21 years old.
IRA Contributions and Distributions
The SECURE Act eliminated the age limit for contributions to traditional IRA plans, which was 70 and a half. Account owners could not contribute to these plans after that age, even if they had not yet retired. They can now contribute without limit.
This change was also driven by the fact that Americans are working longer, and herein lies the catch: you must still be working to take advantage of it.
Provisions for 529 Education Savings Plans
A 529 plan is an education savings plan designed to help parents pay for qualified higher education expenses. Money invested in it grows tax-free, provided that withdrawals are used to pay educational expenses. But like all tax-exempt savings plans, there are rules. Qualified expenses did not include repaying student loan balances.
Now, money can be withdrawn to pay off student loans up to a maximum of $10,000 under the SECURE Act provisions. This helps parents whose children are graduating and leaving unused funds in the savings plans. In these cases, the money will be taxed upon withdrawal.
The SECURE Act also allows for 529 plan funds to be directed towards vocational training programs, private elementary and secondary school costs, homeschooling, and religious schools.
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The downside is that using 529 Plan funds to pay off student loans prevents claiming the tax credit on the interest paid on student loans, or at least the portion that was paid off by the 529 Plan.
Conclusion
These rules seem very straightforward, but you may not want to implement them in your tax plan or integrate them into your tax returns without some professional help and guidance. There are some unclear areas.
Some of these rule changes also affect estate planning, so you may want to consult a professional on how to make them work best for you based on your circumstances.
Source: https://www.thebalancemoney.com/what-the-secure-act-means-for-taxpayers-4796539
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