Introduction to the SECURE Act

Introduction to the SECURE Act

The Setting Every Community Up for Retirement Enhancement Act (better known as the SECURE Act), took effect on January 1, 2020. The SECURE Act 2.0 was signed into law in December 2022 to further expand upon the original SECURE Act as part of the Consolidated Appropriations Act (CAA) OF 2023. It makes significant changes to retirement savings rules and is likely to affect people in or near retirement, new parents, and small business owners and employees. It also will have a major impact on estate planning.

Some of the more impactful SECURE Act changes include:

Required Minimum Distributions (RMDs)

  • Participants must begin taking RMDs annually, beginning the year in which the participant reaches the federal RMD age of 73. The RMD age changed from 72 to 73 effective January 1, 2023.
  • Participants who do not fulfill the annual distribution requirement, risk being assessed a 25% IRS penalty on the undistributed amount. If the distribution is corrected manner (within two years), the excise tax on the failure is further reduced to 10%. 
  • The new law only applies to individuals who turn 73, after December 31, 2022. If an individual turned 73, in 2022, this new law does not apply. That individual must take an RMD in 2022, 2023, and beyond.
  • See Introduction to required minimum distributions (RMDs) for more information.

Traditional IRA Contributions

In the past, clients over RMD age could not contribute to a traditional IRA. The SECURE Act 1.0 allows clients at or over the RMD age, with earned income (wages or self-employment income) to make traditional IRA contributions.
529 Changes

The SECURE Act 1.0 expanded the usage rules of 529 plan assets, as follows:

  • 529 account assets can be used to cover certain apprenticeships.
  • 529 account assets can be used to repay up to $10,000 in student loans for the named beneficiary and any siblings.
    • Example: If your client has three children, up to $30,000 could be used to pay down the student debt ($10,000 for each).

Retirement Account Distribution Options

Birth of Child or Adoption Clients under the age of 59 ½ are not subject to the 10% withdrawal penalty for expenses related to a qualified birth of a child or adoption, up to $5,000 per person.

Note: Pre-tax contributions are subject to income tax.
Inherited IRAs Beneficiaries previously had the option of distributing inherited retirement account assets over their expected lifetimes, often referred to as a "stretch" IRA. Under the new law, many people who inherit a retirement account will be required to fully distribute those assets within 10 years.

Under the 10-year rule, there is no annual distribution requirement for inherited retirement accounts—heirs can distribute the assets any way they want, as long as all the assets are distributed before the end of the 10th year. Failing to do so subjects the remaining funds to a 50% penalty.

The new 10-year rule does not affect existing inherited accounts—that is, those whose original holder died in 2019 or before. It only applies to accounts whose original owners die in 2020 and beyond. In addition, some beneficiaries—known as "eligible designated beneficiaries"—are exempt from this new rule, including the surviving spouse, minor children, disabled individuals, the chronically ill, and beneficiaries fewer than 10 years younger than the original holder (for instance, a sibling).
Qualified Charitable Distributions (QCD) The QCD age has not changed. A client may still give up to $100,000 per year from their IRA directly to a charity without having to include that money in their income. In addition, this donation can be used to cover the RMD.

There is a caveat to this rule within the SECURE Act 1.0. Any pre-tax amount contributed to a traditional IRA after age 70½ directly reduces the allowable QCD. If a client contributes $7,000 to a traditional IRA, and later donates $10,000 in a QCD, they lose the deduction for $7,000 of that QCD. The remaining $3,000 of the donation still qualifies as a QCD.

The disallowed portion of the QCD is treated as a distribution from the IRA, and that amount must be included in taxable income (it also counts toward the RMD). If itemizing deductions, all (or a portion) of the disallowed QCD may be used as a charitable donation on the tax return. resources