What is it and how could it affect your retirement?
By: Josh Koehnen, MsBA, CFP®
The Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, was passed into law in December of 2019. This bill was created to address the nation’s retirement problem by helping more Americans put away money. This new legislation has made pretty large changes to retirement law that will affect almost all citizens.
IRA Distributions and Contributions Changes
If you have begun saving for retirement, you know what an IRA, or Individual Retirement Account, is and how crucial they are to putting away money for the future. Before this law was passed, IRAs had a maximum age for contributions and a hard start date for taking RMDs, Required Minimum Distributions, from the account. Now, the IRA has become a vehicle that may be easier to save in and for longer.
The SECURE Act has changed the contribution rule. Instead of having a maximum age of 70½ to make contributions to a traditional IRA account, people can continue to contribute for as long as they’d like as long as they meet the earned-income requirement. This gives many Americans who don’t retire before 70 the chance to put more money away and have it continue growing on a tax-deferred basis.
In addition to the change in contribution age, the age for RMDs has been set back a year and a half. While previously, people would have to start taking distributions from their IRA accounts at 70½, now they don’t have to be taken until 72. This gives Americans extra time for growth and savings before being required to pull this money out.
No More Stretch IRAs
When a loved one passes away, they may leave their retirement accounts to their family members. Prior to the SECURE Act, a dependent could stretch the distributions from an inherited IRA or defined contribution (i.e. 401k) account for the remainder of their lifetime. Now, the Stretch IRA as we knew it is no more.
Instead of stretching the money over a lifetime, the inherited retirement account must be empty upon the tenth year of ownership for non-spousal dependents. While there are no required distributions within the ten years, all money must be drained faster than in the past. This could be difficult for younger inheritors because accelerating those distributions means accelerating the income taxes with respect to those distributions. There are some groups where the ten-year rule does not apply.
Changes for Small Business Retirement Plans
Some of the most significant changes come in the way that small businesses offer retirement plans. Not only does the act encourage employers to offer 401(k) plans, it also rewards them with an increased tax credit upon plan commencement and a new tax credit for implementing auto-enrollment. By encouraging auto-enrollment, the SECURE Act hopes to increase plan participation and get more people saving for their retirement.
This change also opens employers to offer annuities as investment options within 401(k) plans. By removing fiduciary responsibility from the businesses offering them, it may push more plan sponsors to offer annuities. While these provide guaranteed income to people over their lifetime, annuities are complex and could be difficult to understand how to use, incurring some fees for the owners if used improperly.
Multiple employer plans for small businesses will now have less restrictions and employers who do not share common characteristics will be able to work together. The act also removes the “bad apple rule”, which takes some pressure off those offering the multiple employer plans. Small businesses will now be able to offer potentially more efficient and cost-effective retirement plans to their participants. This does not begin until 2021.
Finally, part-time employees can now be eligible for employer retirement plans. In the past, part-time employees did not have to be offered 401(k) plans. Now those who work 1,000 hours in a year or 500 hours a year for three years will be eligible for enrollment. These people are now considered “long-term part-time employees” ensuring they too get to build retirement funds. This also does not begin until 2021.
Other Significant Changes
Some other law changes of interest include:
- Retirement plans can be adopted up to the due date of the tax return for the taxable year of adoption
- Penalty-free withdrawal up to $5,000 from a 401(k) to offset the cost of having or adopting a child
- Penalty-free withdrawal up to $10,000 from a 529 plan to repay student loans
While not all changes made may be conducive to every American in saving for retirement, these massive alterations are meant to promote retirement planning and give more people equal opportunity for saving.
Investment Advisory Representatives offering advisory services through Premier Wealth Advisors (PWA), a registered investment adviser. Securities and additional advisory services offered through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. PWA and IFG are unaffiliated entities.