The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by President Trump in December 2019 and became effective as of January 1, 2020. While the Act contains 30 separate provisions, a few of them are relevant to employees and should be addressed now. Some are likely to change the way you develop your path to financial planning and estate planning.

Changes to the required minimum distribution (RMD) age and the contribution age

Under prior law, individuals, with some exceptions, were required to begin taking distributions from 401(k) or IRA accounts in the year they turned age 70.5. The SECURE Act increased the minimum age to 72. This rule allows your account to continue to grow before requiring plan distributions.

Note that if you turned age 70.5 in 2019, the old rules apply and RMDs must be taken for 2019 and 2020.

The Act also eliminates the prior law maximum age of 70.5 for traditional IRA contributions. So, if you continue to work, taxpayers over 70.5 can continue to make contributions.

(Note: The CARES Act, passed by Congress and signed by the President on March 27, 2020 waives the required minimum distribution payment in calendar year 2020)

With a few exceptions, 401(k) and IRA accounts inherited by non-spousal beneficiaries must be taken within 10 Years from the death of the IRA participant. That means the ability to leave your IRA to your children and provide them with a lifetime of distributions has been eliminated. This change will require every taxpayer to assess their individual family situation to adjust planning purposes. There are a series of exceptions to the 10 year requirement for distributions to non-spousal beneficiaries, including distributions for minor children, chronically ill and disabled beneficiaries and beneficiaries near the age of the IRA owner.

If you currently name a trust as the beneficiary of your 401(k) for IRA accounts, it's time to revisit your estate planning documents to determine if this is still be best course of action. If you only withdraw the required minimum distribution annually, it may also be a good time to revisit your annual distribution amounts to confirm the RMD is the best tax result taking the new rules into consideration. Taking out larger amounts annually and investing the after-tax amounts in taxable accounts may provide a better long-term plan for your inheritance.

New, penalty-free withdrawals

Under prior law, withdrawals made before age 59.5 were subject to both income tax and a 10 percent penalty payment, unless the distributions were made for specific needs such as medical bills or payment for health insurance payments made after losing a job. The SECURE Act adds a provision allowing a $5,000 distribution from a 401(k) or an IRA within one year after the adoption or birth of a child. You can withdraw the funds without a penalty and can repay the amount in a defined time period without paying tax. Amounts not repaid are subject to normal income taxation.

Withdrawal of College Savings Fund Accounts to pay down student loans

The Act provides a provision allowing for a withdrawal of up to $10,000 for College Savings Funds (IRC Section 529 Plans) to repay student loans. This provision will allow loans to be paid down allowing the student less total interest payments and reduced loan amounts.

Withdrawal of College Savings Fund Accounts for Apprenticeship Programs

A provision of the Act allows for withdrawals from 529 College Accounts for costs associated with certain apprenticeship programs for students. Withdrawals include student fees, along with necessary books, supplies and equipment needed to participate in the program.

What the New Act Means to You

The new act changes the distribution landscape for most non-spousal beneficiaries of 401(k) and IRA accounts. Taxpayers with significant retirement plan balances should take a careful look at near-term and long-term effects of withdrawal requirements. Reconsideration of beneficiaries, including trusts as beneficiaries will require careful thought, financial calculations and in many cases, modifications to designation of beneficiary forms, Wills and Trusts.

A carefully thought out plan regarding the distribution of your estate assets will help solidify the financial future of your heirs. Take time now to consider family concerns and the tax burdens of large withdrawal for heirs.

Gerard J. Kassouf, CPA is a director of Kassouf & Co., P. C. a tax, advisory and financial services firm.