How the Secure Act Could Affect Your Retirement Savings
Updated Jan. 13, 2020: President Trump officially signed the SECURE Act into law. It went into effect on Jan. 1, 2020.
The 2019 year-end spending bill included the Setting Every Community Up for Retirement Enhancement Act of 2019. Known as the SECURE Act, this bill aims to improve the country’s retirement system.
“With the passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” House Ways and Means Committee Chairman Richard Neal said in a statement.
The SECURE Act is the biggest piece of retirement legislation passed in more than a decade.
“I think it’s very well intended,” said Thomas Rindahl, certified financial planner at TruWest Wealth Management Services. “It has a good set of provisions to help encourage and provide access to more retirement savings and security for workers.”
Here’s how the SECURE Act could affect retirement plans.
Retirement Age
The SECURE Act removes the age limit for traditional independent retirement account contributions, which was previously capped at 70 ½ years old. It also increases the age at which retirement account holders must start withdrawing from their accounts from 70 ½ to 72 years old.
“The great news is more people stay active beyond that age and continue to generate an active income,” said Vladimir Kouznetsov, certified financial planner and founder of Retegy LLC. “With longer life expectancy, it’s great to have an option to save additional money in a tax-deferred way.”
401(k) Plans
The SECURE Act makes it easier for small businesses to set up 401(k)s by increasing the cap under which they can enroll workers in "safe harbor" retirement plans. The plan also offers a tax credit of up to $500 to employers who create a 401(k) or IRA plan.
Long-term part-time workers will also be able to participate in a 401(k) plan. To qualify, they must work less than 1,000 hours in a year but more than 500 hours per year for three consecutive years.
There will also be increased options for low-cost income annuities for 401(k) plans, which would allow retirees to get a retirement payout in the form of regular payments instead of a lump sum.
New Parents
Parents will be able to withdraw up to $5,000 from retirement accounts penalty-free for qualified expenses under the SECURE Act within a year of birth or adoption. Parents can also withdraw up to $10,000 from a 529 plan to repay student loans.
“It may be helpful for new parents but can also create a tax trap for some of them,” said Kouznetsov. “The withdrawals are penalty-free but not tax-free. New parents will need to take into account that they will owe tax on the withdrawals at ordinary income tax rates the following year.”
Students can also use their 529 plan money on student loan payments up to $10,000 annually.
Description: New parents with their baby, contemplating their finances.
Retirement Account Death Benefits
Those who inherit a retirement savings account, including 401(k)s and individual retirement accounts, can no longer spread the distributions out over their lifetime. Instead, they must do it within a 10-year period.
The removal of these “stretch” IRAs could create a larger tax burden and increase the need for proper estate planning.
“The government should be happy someone died with money to their name and passed it on,” said Peter Pailon, certified financial planner and president of Master Plan Advisory. “People now have to take money out of these retirement accounts earlier. Younger people may not be as prepared for retirement.”
Conclusion
The SECURE Act introduces significant changes aimed at enhancing the retirement savings landscape. By extending the contribution age, making 401(k) plans more accessible, and offering new benefits for parents and part-time workers, the Act provides more flexibility and opportunities for savers. However, it also requires careful consideration of tax implications and estate planning to maximize its benefits.
