On Dec 20, 2019 President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Clearly, some of the act’s provisions are designed to raise tax revenue, but a few of the changes are taxpayer-friendly measures designed to boost retirement savings.
This Act is quite comprehensive, so we’ll take a stab at distilling it down to the provisions that are most likely to impact those that we care most about – our clients. Here, we break down the good, bad and different changes to the SECURE Act.
Part-time Workers Can Participate
Starting in 2021, the new retirement law guarantees that even part-time workers will be eligible to participate in their company 401k plan. It used to be that you had to work at least 1,000 hours during the year to be eligible. The new law reduces that to just 500 hours for at least 3 consecutive years.
Unfortunately, still today, almost half of all workers in America are not participating in a workplace retirement plan. Clearly some are eligible to but choose not to, but the vast majority of these folks are working for a company that has opted NOT to offer a retirement plan to their employees.
Easier for Small Businesses to Offer a Plan
Fortunately, this new law makes it a bit easier for small businesses to offer a retirement plan for their employees. Employers can now get up to a $5,000 tax credit for starting a 401k plan (previous credit was capped at $500). The law also makes it easier for small businesses to “join together” to provide retirement plans for their employees. Multiple Employer Plans (MEPs) will allow smaller companies to pool their resources to leverage better, lower-cost plans – typically not available to small businesses. All of this should translate into a higher percentage of employees at small companies getting access to retirement plans.
In the past, contribution to retirement accounts could not exceed the amount of your compensation. So if you didn’t earn any work-related compensation you generally couldn’t make retirement fund contributions. Under the SECURE Act, students pursuing graduate or post-doctoral study or research that are receiving aid in the form of a fellowship, stipend or similar, are now eligible to contribute to IRA accounts.
What It Means for Your Beneficiaries
Now for some bad news. Previously, when a retirement account owner passed away, they were able to leave that account to a non-spouse beneficiary who was able to take distributions from that account over the course of their lifetimes. This was often referred to as a “stretch IRA.”
The upside of doing this was that by taking distributions over a long period of time, the funds in the account were still able to grow tax-deferred and only a small percentage was required to be withdrawn each year and thereby only a small percentage of taxes would be triggered each year. Starting January 1, 2020, this all changes.
Going forward, anytime a retirement account is left to a non-spouse beneficiary – that account must be fully withdrawn over 10 years, likely a much shorter time frame. Exceptions to this are in cases where the beneficiary is a minor child, disabled, a chronically ill individual, or if the beneficiary is not more than 10 years younger than the deceased IRA owner.
New Withdrawal Options
If you are expecting a child or planning to adopt a child, the new law will allow you to withdraw up to $5,000 from your IRA, 401k, or another retirement account without triggering the normal 10% early withdrawal penalty (you will, of course, still pay taxes on the withdrawal). If you are married, each spouse can withdraw up to $5,000 from their own retirement account for a total of $10,000 for a married couple. A word of caution though! Weigh this option carefully – a $10,000 combined withdrawal today could mean $76,000 less in retirement accounts down the road.*
New Required Minimum Distribution Age
For our more “experienced” clients that are nearing the Required Minimum Distribution (RMD) of 70 1/2, the act now delays the required age to begin required distributions from IRA and 401ks to age 72. Note this only applies to folks that have not yet attained age 70 1/2 by 12/31/19.
In addition, for our clients still working into their 70s, the new law allows you to contribute to your IRA or Roth IRA regardless of age, as long as you have earned income.
How does The SECURE ACT impact YOU?
All in all, there are quite a few changes here and not all of them will have an immediate impact on your situation today. That said, we’re here to make sure you’re aware of these changes because they certainly could impact your plans in the future. And if there is anything for certain in financial planning, it’s that plans change. Being armed with this information will hopefully help you, or those close to you, navigate what can often seem like a pretty frustrating and complex set of rules and regulations. And remember, blooom clients, if you need help navigating, we’re always here for you!
SECURE your 401k and IRA with blooom
The SECURE Act brings forward a lot of things to think about and consider, if you wish to know the health of your 401k or IRA, click here for our free analysis. This analysis will put the health of your retirement account into perspective and see where it could be optimized to better yourself and your financial future!
*Assumes a 7% average annual rate of return over 30 years, age 30 to age 60, hypothetically.
The information is provided for discussion purposes only and should not be considered as advice for your investments or tax advice. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.