Secure Act: What It Is & How It Affects Your Retirement

Andrea Coombes, Tina OremSeptember 16, 2020

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There’s a new law in town, and it wants to help you improve your retirement savings outlook. It's called the Secure Act.

What is the Secure Act?

The Setting Every Community Up for Retirement Enhancement Act, known as the Secure Act, is legislation that changes some IRA and 401(k) rules, including the ability to delay distributions, reduced flexibility for inherited IRAs and penalty-free withdrawals for new parents.

The Secure Act has many moving parts. Some provisions are aimed at individual savers; others are focused on employers. Here are some money moves you might consider as a result of the law.

Secure Act summary and some moves to consider

1. Plan ahead for inherited IRAs

Before the Secure Act, if you inherited an IRA from someone other than your spouse, you were required to take distributions from that account, but you could stretch out those payments over your entire life.

Under this law, if an IRA owner dies in 2020 or after, the account’s beneficiaries must take all of the money out of the inherited IRA within 10 years after the year of the death. (Some beneficiaries, including spouses and minor children, are exempt from this rule.)

If you inherit a Roth IRA, this isn’t that big of a deal — everything comes out of a Roth tax-free. But with a traditional IRA, you pay income tax on distributions in the year you take the money out. (Learn more about the differences between Roth and traditional IRAs.) That could add up to a big tax hit, especially if, for example, an account owner in their 80s leaves a hefty IRA to an adult child in their 50s, who may be in their highest-earning years.

That means they’re in a higher tax bracket, and the corresponding tax rate will apply to distributions from that inherited IRA, which are taxed as income. On top of that, the distributions may push the taxpayer into an even higher tax bracket.

Money move: If you inherit a traditional IRA, have a plan for withdrawals to avoid a big tax bill. You can choose the tempo of your distributions — a little bit every year for 10 years, all at once or some other pace. That lets you manage your tax bill each year.

2. Rethink IRAs for estate planning

People who have hefty IRAs that they want to leave to their heirs need to consider the same provision described above: Non-spouse beneficiaries must empty inherited IRAs within 10 years. There’s no way to let that money continue to sit and grow, and the tax bill on distributions may be big.

Money move: If you’re planning to leave a big IRA to your heirs, consult an estate plan expert to assess your best options under this law.

  • One option is to convert traditional IRA money to a Roth, so your heirs won’t owe tax on the distributions (this may mean a tax bill for you, so consult with a tax expert).

  • Another route could be investing in a cash-value life insurance policy, which can offer tax benefits.

  • You might also consider contributing to charities from the IRA starting when you’re 70 1/2 (which can be done without incurring income taxes) and leaving other accounts to your beneficiaries instead.

3. Do more Roth conversions

The law eliminates the age limit — previously 70 1/2 — on contributions to a traditional IRA. That means people who earn too much to be eligible to contribute directly to a Roth IRA can employ the strategy known as the backdoor Roth IRA — where you convert a traditional IRA into a Roth and sidestep the Roth IRA’s income limits — for longer.

Before this law, that strategy wasn't workable once you turned 70 1/2 because the process started by being eligible to contribute to a traditional IRA. Now, backdoor Roths are possible even after 70 1/2.

Money move: If you like the idea of avoiding required minimum distributions (which are required for traditional IRAs but not Roth IRAs) and of embracing the tax-free investment growth offered by a Roth, consider a strategy for systematic Roth IRA conversions past 70 1/2.

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4. Max out IRA contributions for longer

As noted, before this law, contributions to a traditional IRA had to stop once you hit 70 1/2 (Roth IRAs have never had age limits). Now, there’s no age limit, so you can keep contributing.

But don’t forget: You need income from work to contribute to an IRA. (If you’re married and file your taxes jointly, a nonworking spouse can contribute to an IRA as long as each spouse’s IRA contributions combined don’t add up to more than the couple’s taxable compensation and don’t exceed annual contribution limits.)

Money move: Consider contributing to your IRA beyond 70 1/2 — for as long as you’re working.

5. Get the lowdown on annuities

The Secure Act makes it easier for employers to offer annuities in 401(k)s and similar workplace retirement plans.

Annuities make sense for some people, and they can offer a helpful source of guaranteed income in retirement, but they’re not for everyone.

Money move: If you’re considering an annuity in your plan, work with a fee-only financial advisor to ensure it’s the right choice. Here’s more on how to decide if a retirement annuity is right for you.

6. Delay 401(k) and IRA withdrawals

Before this law, you generally had to start taking required minimum distributions, or RMDs, from 401(k)s and IRAs when you turned 70 1/2.

Under the Secure Act, the age that RMDs must start has been pushed out to 72. This only matters for folks who don’t need to tap their savings earlier — many people can’t afford to wait.

That means the biggest benefit for most people may be this: No one has to wrap their heads around that half year anymore.

Money move: Plan your retirement income strategy before you retire. If you have enough savings in other accounts, or you earn enough from Social Security or a job and you don’t need to tap your retirement accounts, you may want to take advantage of this new opportunity to delay retirement plan distributions until 72 — and let your retirement savings sit and grow longer, tax-deferred.

7. Students, save more

To contribute to a traditional or Roth IRA, you must have what the IRS calls "taxable compensation." The annual IRA contribution limit is the smaller of your taxable compensation or the $6,000 ($7,000 if 50 or older) IRS limit.

Eligible types of income include wages, salaries, bonuses, tips and net income from self-employment. The law adds a category of compensation that qualifies as eligible for IRA contributions: certain nontuition fellowships and stipends. That’s good news for graduate students, who are often paid that way.

Money move: If you receive qualified fellowships and stipends, you may want to stash at least some money in an IRA each year. Thanks to the power of compounding, even a small amount invested now can grow to power your retirement decades down the road.

8. New parents, breathe easier

IRAs, 401(k)s and other retirement plans offer sweet tax benefits and in return for those tax breaks, you need to abide by the fairly strict withdrawal rules or risk getting hit by a hefty 10% early withdrawal penalty.

But there are some exceptions to the early withdrawal rules, and the law adds one more: In the year you become a parent — through birth or adoption — you can withdraw up to $5,000 from your IRA or other retirement plans without getting hit by the penalty. You’ll still face income taxes. The $5,000 limit is per individual, so a couple could withdraw $10,000.

Money move: If you’re a new parent who is struggling financially, know that there’s now an avenue for finding financial relief, if necessary. That said, it may be worth seeking alternative sources of money if possible. Once you pull money out of a retirement account, you can never recover the lost investment growth on those dollars — although the law allows you to repay the distribution back to a retirement account at any time.

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