Big Changes to Retirement Accounts and College Savings Accounts in 2020

On December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, substantively changing some tax-advantaged savings and retirement accounts.

You can contribute to a 401(k) and a ROTH IRA if you are working. Before 2020, you could not contribute to a traditional IRA after age 70 ½. That age cap was removed on January 1, 2020.

Starting this year, the age for annual required minimum distributions (RMDs) from traditional IRAs and 401(k)s (traditional or ROTH) went up from 70 ½ to 72. But you still must take your RMD for 2019 if you were 70 ½ or older that year.

If you inherited a retirement account, it was also subject to annual RMDs, regardless of your age, unless you chose to liquidate the entire account within five years. You could stretch those withdrawals over your lifetime. Accounts inherited in 2020 or later must now be liquidated within 10 years, and do not have any requirements about when withdrawals are made. There are a few exceptions to this new 10-year timeline rule, such as for accounts inherited by qualified disables beneficiaries, and accounts bequeathed to minor children or spouses.

The SECURE act expands the use of 529 college-savings plans. Starting in 2020, withdrawals can also be used tax-free if used for an apprenticeship program registered and certified by the Department of Labor. Also, a life-time limit of $10,000 can be withdrawn tax-free if used to pay off the principal portion of student loan debt, plus another $10,000 per each of the beneficiary’s siblings. This provision of the SECURE act is retroactive to the beginning of 2019.

The SECURE Act will make it easier for smaller companies to join multiple-employer plans, which should lower costs since bigger plans can benefit from economies of scale. Also, employers will get an extra tax credit for starting to offer a plan, and for automatically enrolling workers.

Finally, more part-time employees will be able to participate in an employer plan. Previously, plans could exclude employees who worked less than 1,000 hours a year. The new threshold will be a single year of at least 1,000 hours or three consecutive years of at least 500 hours. However, employers will have the option of not offering the same match or profit sharing to part-time employees that full-time employees receive.