What You Need to Know about The SECURE Act
Big changes took effect for retirement savings earlier this year.
The Setting Every Community Up for Retirement Act (SECURE Act) was signed into law on Dec. 20, and much of its details went into effect on Jan. 1.
The law aims to take action on several rules related to retirement, specifically to reflect the current retiree demographic. It also expands access for employees to retirement plans and helps businesses offer retirement plans to staff. There are even provisions in it affecting paying back student loans and the birth or adoption of a child.
Take a walk through the changes with us!
Not everyone retires the moment they turn 65 these days, as both longer working careers and longevity of life are impacting retirement timing. We all want to have enough to live comfortably if our life stretches several decades into the future after retirement!
Change: Contributions to a traditional IRA no longer have an age cap of 70.5.
This means you can continue contributing to your traditional IRA as long as you’d like! If you’re still bringing in a paycheck, go ahead and keep contributing to your retirement savings.
The law also increases the required minimum distribution age. Previously, once you turn 70 ½, you needed to begin withdrawing funds from a retirement account with a minimum amount each year.
Change: Required minimum distribution age raised to 72.
A little more time before you start drawing on your accounts can make an impact down the road.
The SECURE Act also eliminated an important provision known as a “stretch IRA.” This practice enabled beneficiaries other than spouses to spread the distribution of a traditional IRA or retirement plan throughout their lifetime. Rather than taking a lump sum, or having a limited window of time to receive that inheritance (thus paying higher tax obligations), the payments could be “stretched.”
Change: Any beneficiary more than 10 years younger than the account owner must liquidate the account within 10 years of the account owner’s death (exceptions for spouses, disabled, minor child, or chronically ill recipient).
This change will have an impact on individuals who may inherit high-value traditional IRAs, with higher than anticipated tax bills, as well as IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
More Access to Retirement Plans
Long-term, part-time workers may have access to retirement plans at work they never had before. Many companies offer retirement plans to full-time employees, but may not have the same benefit in place for part-timers.
Change: If you are employed part-time and age 21 or older, you can participate in a company retirement plan if you worked 500 work hours in three consecutive years.
Note that this part of the law doesn’t go into effect until January 2021. And while plans may now be offered, the law does not require employer contributions as part of that.
Small businesses can now claim a larger tax benefit for offering a new retirement plan.
Change: Higher tax credit for small businesses who offer new retirement plans.
The tax credit can be the higher amount of either:
- $250 times the number of non-highly compensated eligible employees, OR $5,000 (whichever is lower)
The credit will be applicable for three years after starting a new plan. The previous tax credit was up to half of startup costs, with a cap of $500.
An additional tax credit for businesses of all sizes is a $500 tax credit for those offering a SIMPLE IRA or 401(k) plan for the first time with automatic enrollment.
Change: Additional tax credit for SIMPLE IRA or 401(k) plans with auto enrollment.
This tax credit can also be applied for three years.
Starting in 2021, employers now have better access to joining a multiple employer plan, known as MEPs. Previously, because of the “one bad apple” rule, the IRS could disqualify an entire MEP tax-qualified status if only one participating employer violated the qualification rules. Participants in MEPs also needed to have a common interest such as the same industry.
Change: The failure of one employer in an MEP to meet plan requirements will not cause the other participants to fail.
Change: Employers no longer need to share a common interest to participate in an MEP together.
With these changes under the SECURE Act, more businesses will have the option to explore and participate in MEPs, and the stigma of participating with the incidence of the entire plan being disqualified is removed.
- Employees will begin to receive annual statements from their employers estimating how much their retirement plan assets are worth. These statements will specifically show the retirement assets on a monthly income basis.
- Lifetime income annuities are now more easily offered within a retirement plan. Previously, employers could be held liable if an annuity provider did not make the regular payments to beneficiaries as promised. The SECURE Act grants employers a “fiduciary safe harbor,” to release the pressure of that liability. Annuities can help individuals have a predictable stream of income indefinitely, however, they may not be the best fit for everyone. Talk to one of our financial planning specialists to help you understand the right choice for you.
- If you’re having a baby or in the process of adopting a child, this law has something to help you, too! Individuals can now take penalty-free early withdrawals of up to $5,000 from their retirement plans because of the birth or adoption of a child. Each parent can make such a withdrawal (if their accounts are separate), and you have a year to make this withdrawal. While regular income taxes still apply, this kind of access for anything from hospital bills to baby gear can be useful (though it’s generally best to avoid pulling from retirement accounts, so proceed with caution and advice from a financial advisor).
- If you’re hanging on to student loans, or you have a child who is, this Act establishes that 529 savings accounts can now be used to pay for student loan repayments – with a $10,000 lifetime maximum. The account type can also be used for apprenticeship costs if it is a registered apprenticeship.
- Auto-enrollment in safe harbor retirement plans have an updated cap. Previously employers could auto-enroll until a worker reached contributions of 10 percent of their salary. Now that amount has been raised to 15 percent.
With all these changes via the SECURE Act, there may be many reasons to meet with a financial advisor – you may need to consider converting traditional IRA funds to Roth IRAs (which can be inherited income tax-free), opening or using a 529 plan differently, contributing to your IRA longer, etc. If you don’t already have a reliable financial advisor who understands your needs and really listens to you, get in touch with us today!
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