Getting SECURE: Part 5

This is the fifth article in my series about the SECURE Act. Most of our topics centered around IRAs. Today we look at the 401(k) plan and 529 College Savings Plans. But first, a big warning if you use a Trust as a Retirement Account Beneficiary.

Instead of leaving inherited assets to individuals or charities, an advanced estate planning technique means they land in a trust. This is fraught with taxable dangers, but a good estate attorney knows how to put the right words and caveats into the trust document to meet the needs of their clients. However, now that most beneficiary IRAs have to follow the 10-Year Rule it is very possible that the perfectly created trust document is now very wrong.

So now you’ve been warned: If you have a trust as beneficiary of your IRA stop reading and schedule an appointment with your attorney and find out if changes from the SECURE Act are messing up your carefully laid plans.

Now that we got the warning out of the way, we head over to employer-sponsored retirement plans. There have been many changes here, most of which are of interest primarily to the employer. So, if you are an employer with a retirement plan or are looking at adding one (especially if you are a small business where you might get up to a $5000 tax credit to start one), then put on your learning cap and start digging into the Act’s provisions.

On the employee side of things, the biggest change that I’ve found is that long-term part-time workers now have better access to an employer-sponsored plan. Up until this year, workers who had less than 1000 hours in a year could be excluded from the plan. Now, employees who have worked 1000 or more hours in a year and those who worked 500 hours a year for three years in a row will be able to participate in a company’s 401(k) plan. (Don’t hold your breath, part-timers; the 500-hour rule doesn’t start counting until year 2021 meaning that the earliest you would be deemed eligible would be the 2024 plan year.)

On the education front, 529 Plans have also been addressed by the SECURE Act. Unlike most of the Act, this rule is retroactive back to the start of 2019. To get the full benefit of a 529 Plan you need to spend the money saved on “Qualified Education Expenses.” The definition of that term for 529 Plans is the most expansive of the various education savings vehicles, and now starting for tax year 2019 and onward you get a new expense added to the mix: Qualified Education Loan Repayments (otherwise known as student debt).

The max lifetime is $10,000. It seems that not only the beneficiary of the 529 Plan but distributions to their siblings also qualify. For most, their 529 Plan was (or will be) emptied paying for college expenses. But for those with money left over this is a way to wring a bit more tax savings out of the plan.

We conclude our SECURE Act series next week.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.