Personal Finance 101 – How Does the SECURE Act Affect Younger Investors?

By Brittany Mollica

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December of 2019. As you can tell from its name, the primary focus of this legislation is on retirement and if you’re anything like me, retirement seems impossibly far away. (If you’re not like me and retirement seems close, then check out our earlier post on the SECURE Act.)

However, the SECURE Act changes a wide variety of rules, and several items could be relevant to younger families and professionals. Here are some of the most notable changes:

If you’re a new parent:

You can now take a penalty-free distribution of up to $5,000 from your employer retirement plan or IRA to cover expenses related to the birth or adoption of a child. If you’re married, you and your spouse can each withdraw $5,000.

While it’s great to have this extra flexibility, we recommend that you prepare cash reserves to cover these expenses instead of withdrawing from your retirement savings, since you’ll still be required to pay income tax on any distributions of pre-tax dollars. But it doesn’t hurt to have the extra option.

If you have a 529 plan or student loans:

Withdrawals from a 529 education savings plan will now be tax- and penalty-free when used to cover expenses for a registered apprenticeship, homeschooling, and private elementary, secondary, or religious schools, as they always have been for college expenses.

You can also freely withdraw up to $10,000 from a 529 plan to pay off student loans. It seems unlikely that many individuals would concurrently have money in a 529 plan AND student loans (because why take out a loan when you have money saved up for education?), but we do foresee a few scenarios where it could be a strategic move.

If you’re a graduate student:

Before the SECURE act, you could only make an IRA contribution if you had earned income for the year. Now, the definition of “earned income” has been broadened slightly to include stipends and non-tuition fellowship payments.

We imagine this will help graduate and postdoc students begin to set aside savings for retirement at any earlier age. This is great because the sooner you can start funding a Traditional or Roth IRA, the better.

If you’re a part-time employee:

Part-time employees can now participate in their employer’s 401(k) plan more easily because the eligibility requirements have decreased. Starting in 2020, if you work at least 500 hours/year (that’s only ~10 hours/week) for 3 consecutive years, you will then be allowed to make 401(k) contributions. Note that the part-time service will start being counted in 2021, so it will be a few more years before anybody can take advantage of this. But it’s better late than never.

If you work for a small business:

If you work for a small business, your employer may not even offer a company retirement plan yet since they can be complicated and expensive to set up. But there is hope! Due to several technical changes, the SECURE Act should make it simpler and more cost-efficient for your company to provide a retirement plan.

We feel that any change that makes it easier to save for retirement is a good change!

If your children have investment accounts:

If your child has unearned income, such as interest or dividend income from a UTMA account, the SECURE Act has made the tax calculation on that income more favorable by undoing a change from the 2017 Tax Cuts and Jobs Act.

Essentially, any unearned income above the threshold for your child (which is $2,200 for 2020) will now be calculated based on your marginal tax rate rather than the tax rate for trusts and estates, which is usually higher.

Since the SECURE Act covers such a wide range of retirement-plan rules, it will affect many people in different ways. We encourage you to reach out to a financial advisor to discuss how you can plan for these changes.

 

Disclaimers: This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.