SECURE Act: What It Could Mean for You
With the passage of the SECURE Act, retirement plan changes may be part of your New Year — whether you resolved to save more for your future or not. President Trump signed the “Setting Every Community Up for Retirement Enhancement” Act into law last week on Friday, Dec. 20, and it’s due to go into effect on Jan. 1, 2020.
Part of a package rushed out the door before the year, the purpose of the SECURE Act is to help more Americans prepare for retirement. And with its 26 provisions due to take place in less than a week, you may be wondering how it could affect you. If you own or work for a small business or have an IRA or 401(k) — among other areas the new law impacts — allow me to explain.
The SECURE Act is changing three major ways in which IRAs work: the maximum age to contribute, the required minimum distribution (RMD) age, and non-spouse beneficiary distribution provisions.
Section 107. Repeal of Maximum Age for Traditional IRA Contributions
Previously, when workers reached the RMD age of 70½ (more on this shortly), they were no longer permitted to contribute to their IRAs. Repealed as of Jan. 1, 2020, the maximum age goes away, and those with earned income can continue to fund their IRAs.
That means, if you’re 75 and working but haven’t been able to contribute to your IRA for the past four and a half years, you’ll soon be able to resume contributions — as long as you continue to earn income.
Section 114. Increase in Age for Required Beginning Date for Mandatory Distributions
Today, the RMD age — or the age at which retirees with IRAs must begin drawing on their IRA accounts — is 70½. The SECURE Act changes that age to 72, allowing retirees to grow their savings for a bit longer. So where does that leave retirees currently taking RMDs?
It’s simple: If you turned 70½ during 2019, you have until April 1, 2020, to take your first RMD … or pay the 50% penalty. And you’ll continue taking RMDs under the “old” rules. If you’re younger than 70½ on Dec. 31, 2019, the new rules will apply, and you’ll wait and take your first RMD by April 1 in the year after your 72nd birthday.
Section 401. Modifications to Required Minimum Distribution Rules
The last major IRA-related change the Act brings about is for non-spouse beneficiaries of IRAs and defined contribution plans. And unlike the Sections 107 and 114, it also applies to Roth IRAs. Most beneficiaries who are not the spouses of the deceased who receive Traditional or Roth IRAs will be required to take RMDs from the account within 10 years of the original owner’s death. This is a change from beneficiaries previously being able to “stretch” RMDs over their own life expectancies.
Similar to the increased RMD age, if you become a beneficiary of an IRA or defined-contribution plan due to the original owner passing away in 2019, you can spread distributions from the account across your lifetime. If the same happens in 2020, your situation will fall under the new rules.
Falling into “TITLE I: Expanding and Preserving Retirement Savings” of the SECURE Act, the removal of the maximum age and increase in RMD age allow Americans to continue saving in tax-advantaged IRAs longer. And as many more are working beyond the “retirement age” of 65, the new law gives older workers more time to build their nest eggs through IRA contributions.
The beneficiary IRA and defined-contribution plan change, however, falls into “TITLE IV: Revenue Provisions,” which is based around generating $15.7 billion in tax revenue.
Given that 401(k)s are a type of defined-contribution plan, Section 401 of the Act — the non-spouse 10-year distribution requirement — applies here as well. In addition, 401(k)s specifically will see one other major change: Long-term part-time workers will have the opportunity to participate in their employers’ 401(k)s.
Section 112. Allowing Long-term Part-time Workers to Participate in 401(k) Plans
The number of hours part-time employees must work in a year to qualify for 401(k) participation is dropping. The SECURE Act will change that number from 1,000 to 500, but some stipulations apply. To become eligible, a part-time employee must either work 1,000 hours in one year or work 500 hours for three years (hence “long-time” part-time workers), although employers may choose to exclude employees who fall into the latter option. If you’re a part-time worker interested in participating in your employer’s 401(k) plan, you should check with your employer for eligibility due to the exclusion option.
Both fall under “TITLE I: Expanding and Preserving Retirement Savings,” with part-time worker 401(k) participation opportunities allowing workers to save more through employer-sponsored retirement plans. Section 112 is particularly geared toward offering women — who the Act describes as “more likely than men to work part-time” — opportunities to save for retirement.
For Americans with ties to small businesses, the SECURE Act brings further changes: Employers who start new pension plans are eligible for an increased credit, those who auto-enroll employees in their plans can receive a credit, and small businesses can join together to offer employees retirement plans with reduced administrative requirements.
Sec. 104. Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs
To encourage employers to begin retirement plans they didn’t offer before, this credit aims to make it more affordable to start those plans. Employers can choose to receive a $500 credit or, if the credit would be greater than $500, select between $250 in credit for each employee who is eligible to participate or $5,000, whichever is less.
Section 105. Small Employer Automatic Enrollment Credit
With an emphasis on automatic enrollment, “shown to increase employee participation and higher retirement savings,” small employers who begin new 401(k) or SIMPLE IRA plans for employees are eligible for a $500 credit. Those who add automatic enrollment to existing plans are also eligible.
Section 202. Combined Annual Reports for Group of Plan
By combining employees from different businesses under one defined-contribution plan with one administrator, one fiduciary, and the same investment options for all participants, small business owners can simplify retirement plan sponsorship. This provision allows them to band together and file a single Form 5500, potentially saving on administrative costs as well.
Both part of “TITLE I: Expanding and Preserving Retirement Savings,” Sections 104 and 105 allow the tax credit for up to three years. Falling into “TITLE II: Administrative Improvements,” Section 202 allows employers to more easily offer retirement savings vehicles to employees who can, in turn, save more for their futures.
And these aren’t the only changes the SECURE Act is bringing about. Others include penalty-free retirement plan withdrawals for expectant parents; 529 plan withdrawals for apprenticeships, homeschooling, student loan repayment, as well as private and religious school costs; and a higher penalty for failure to file taxes.
Will the new law change how you save for retirement in 2020 and beyond? No matter how the provisions impact your life, your financial professional can help you navigate the changes — and what they could mean for your retirement.
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