The Secure Act is short for “Setting Every Community Up for Retirement Enhancement” and was signed by President Trump on December 20, 2019.  It became effective on January 1, 2020.  This act changes some of the rules for retirement planning, college planning, and student loan repayment.

Due to the increase of student debt concerns, more and more legislation changes will be occurring at both the federal and state levels.  Listed below are the key outcomes of the Secure Act.  Please click here to view the Secure Act as listed by Richard E. Neal, Chairman of the House Committee on Ways & Means.

Secure ACT Key Changes

• Repeal of Maximum Age for Traditional IRA Contributions

The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. As Americans live longer, an increasing number continue to work.  Under the act, a person can contribute to their traditional IRA past the age of 70 ½ if they have earned income. 

• Increase in Age for Required Beginning Date for Mandatory Distributions

The bill increases the required minimum distribution age from 70 ½ to 72.  RMD now begins at age 72 for individuals who turn 70 ½ in the calendar year 2020. 

• Allowing Long-term Part-time Workers to Participate in 401(k) Plans

Part-time employees will now be able to participate in a company’s 401k program.  There are certain employee classes that will not qualify for this change.  As an example, collective bargaining employees are excluded from this rule.  There are rules for employees to qualify for this new benefit.  To get access, these part-time employees must meet a specific number of hours worked per year and the number of years employed. The employer has the right to exclude the part-time employees in the nondiscrimination testing for the overall plan and highly compensated rules.

• Small Employer Automatic Enrollment Credit

Automatic retirement enrollment normally results in increased employee participation and higher retirement savings. The legislation creates a new tax credit worth up to $500 per year to employers to reduce startup costs of new section 401(k) plans and SIMPLE IRA.  These plans must include the automatic enrollment option to receive the credit. This credit is in addition to the plan start-up credit allowed under present law and is available for three years. It will also include employers that convert an existing plan to an automatic enrollment design.

• Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs

Pension plan start-up costs will now be able to receive a higher tax credit, making it more affordable for small businesses.  The legislation increases the credit by changing the calculation. Employer will have the option between a flat dollar amount limit on the credit to whichever is greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.

• Expansion of Use for Section 529 Saving Plans

The owners of 529 plans can now use these funds to paydown qualified student loan debt up to $10,000 per year.  In addition, these funds can be used for costs associated with registered apprenticeships and homeschooling. This is also limited to $10,000 per year per child.  Last year tax code change extended 529 funds to qualified tuition for private elementary, secondary, or religious schools.

• Kiddie Tax Rule Reversion to Parent’s Income Tax Rate

In the 2018 tax code change, one of the biggest issues was the change to the Kiddie Tax rules.  The 2018 rules change applied the Estate and Trust Income Tax Table to the Kiddie Tax income exposure rather than the parent’s income tax rate.  For some families, this was a significant financial increase in their taxes owed.  The Secure Act reverses the Kiddie Tax rules back to the parent’s income tax table for this income type starting in 2020.  It is also made it retroactive for prior excess taxes paid but an amended return will need to be filed if elected.

• Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes

Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation.  In the past, they could not be used as the basis for IRA contributions. The Secure Act removes the prior obstacle to retirement savings by making such amounts available as income when considering IRA contribution purposes. This change will enable these students to save for retirement better and benefit from tax-favored retirement growth.

• Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption

The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions” up to $5,000 from an applicable defined contribution plan, such as a 401 (k) or an IRA.  The income tax will still need to be paid on the amount withdrawn.

• Modifications to Required Minimum Distribution Rules

The legislation modifies the required minimum distribution rules with respect to the defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

Secure Act Impact Direct Impact on Educational Funding and Student Loans

With the Secure Act becoming law, there are some direct changes to college saving plans and student loan repayment.  You must remember that these changes are at the federal level.  States that offer state income tax contribution incentives or have a pre-paid program may see additional adjustments.  These initial state incentives were designed for college saving plans and not these new uses.

The Kiddie Tax reversion is also a big help to families.  The parent’s income tax table has higher income limits per tax rate than the Estate and Trust Income Table.  This is especially helpful for lower and middle-income families trying to pay for college.

I was excited to see the additional use of the 529 plan money for student debt reduction.  This will help families better utilize their 529 saving plans and improve their debt structure.  By taking the Direct Stafford Loan as an undergraduate, families will now have the opportunity to pay off student loan debt with 529 money at graduation. This strategy is for the student who will not be attending graduate school.  If the student will be going to a post-graduate program, the remaining 529 funds can be used to offset the higher cost of graduate school loans.  This is a big deal from a planning standpoint.

The majority of the Secure Act focused on increasing retirement benefits which have an impact on a person’s adjusted gross income.  With more than 54% of student debt dollars being repaid using Income-Driven Repayment methods, borrowers need to find the right tools to help them manage their adjusted gross income.  With the proper strategies, borrowers can be reducing their loan repayment amounts and saving for retirement at the same time.  If you are a borrower that falls into this category, the PayForED Repayer software can provide all of the various scenarios in an easy-to-read format. 

With both 529 money changes, student debt repayment, and the use for non-college tuition expenses, states will be making adjustments. We will have to wait and see if states follow the federal definition or if they will pass new supplemental laws.