MONEY TALKS – The Setting Every Community Up for Retirement Enhancement Act of 2019, more commonly known as the SECURE Act, was signed into law on December 20, 2019 by President Donald Trump. This broad ranging bill was primarily designed to improve the access and ability for Americans to save money for retirement and to increase withdrawal options during their retirement years. While some provisions in the law are clearly intended to raise revenue, the vast majority are designed to help workers reach their retirement goals. Here is a summary of some of the more notable changes that could affect you and your retirement starting in 2020.
Individual Retirement Account (IRA) Contributions – Before the SECURE Act was passed, workers could not make contributions to their IRA’s once they reached age 70½. The new law extends the contribution limit to age 72. This means that workers in their early 70’s who previously could not contribute to an IRA may be able to stash away an additional $7,000 per year towards retirement. However, it’s important to note that the law does not take effect until 2020, so those who turned 70.5 in 2019 will not be eligible to make a 2019 IRA contribution, although they may be eligible to make a contribution in 2020.
401(k) Plan Eligibility – Previously, if you worked less than 1,000 hours per year, you generally were not eligible to participate in your company’s 401(k) plan. Under the new law, with the exception of certain collectively bargained agreements, employers who maintain 401(k) plans must offer eligibility to part-time employees age 21 or older who have worked at least 500 hours per year for three consecutive years. This change will greatly increase the accessibility for part-time workers who want to increase their retirement savings by participating in their company’s 401(k) plan.
Required Minimum Distributions (RMDs) – Until now, retirees were required to begin taking taxable distributions from Traditional IRA and 401(k) accounts once they turned 70½. The SECURE Act extends the RMD start date to age 72, which means that retirees can now let their nest egg grow an additional 1½ years before they have to begin taking withdrawals. Unfortunately this provision only applies to those retirees turning 70½ in 2020 and does not apply to those who turned age 70½ or older in 2019. This is perhaps the most significant provision in the law change because it allows retirees to grow their assets for a longer period of time without having the burden of taking a taxable distribution from their account.
Lifetime Income Investment – The SECURE Act encourages employers with 401(k) plans to let employees convert their savings into a guaranteed lifetime income stream, via an annuity. In the past, employers had been skittish to offer such options because they could be held responsible if the insurance company offering the annuity did not make the required payments. However the Act puts the onus on the insurance companies selling the annuities to offer proper investment choices and make the requisite payouts or they, not the company offering the 401(k) plan, risk being sued. This change in accountability from employer to insurance provider will surely lead to more employers offering annuity options within their company retirement plans.
Inherited IRA Distributions – Under the old legislation, if you inherited an IRA or 401(k), you could “stretch” the distributions out over your life expectancy. This was particularly useful for those inheritors who didn’t need the income or want to pay the taxes on the distribution. Unfortunately under the SECURE Act, beneficiaries must now withdraw all assets from an inherited account within 10 years. There is some flexibility in that there are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. This provision was clearly put in place to generate revenue via taxes for the government. Fortunately there are some common sense exceptions to the rule. IRA or 401(k) accounts left to a surviving spouse, disabled or chronically ill individual, a child who has not reached the age of majority, or an individual who is not more than 10 years younger than the original owner, are not required to adhere to the 10 year rule.
The Bottom Line – The SECURE Act has a lot of changes that will positively impact one’s ability to save for retirement and preserve retirement assets. The Act also has several other “non-retirement” based provisions which are not included in this article such as the ability to take a penalty free distribution for a qualified birth or adoption and the flexibility to pay off student loan debt using a 529 plan. The SECURE Act may present opportunities to save more towards retirement and pay less in taxes depending on your specific financial circumstances. Accordingly, you should review your financial plan with your financial advisor and make necessary updates and corrections as needed.