Feeling Secure About the SECURE Act
On December 19 of 2019, the Senate approved the Setting Every Community Up for Retirement Enhancement Act which was then signed into law by the President the following day. Also known as the SECURE Act, the new law has significant implications for how many of us will be able to save for and experience retirement. With that in mind, we want to offer an overview of the law and how it might affect you so that you can continue to make the most of your savings.
As its name implies, one of the goals of the bill is to increase both access to retirement accounts and increase participation. This is particularly important given the current state of retirement savings in the U.S. According to a U.S. Bureau of Labor Statistics report published in 2018, only 55% of the adult population participate in a workplace retirement plan and with the average 401(k) balance of someone in their 60s sitting at roughly $195k (according to a recent report by Fidelity), those who are saving are struggling to save enough. In response, the bill makes it easier for many employers, especially those of small businesses, to set up 401(k)s and make them available to their employees including those who work part-time and have historically not had much access to employer-sponsored plans. The law now requires that employers who offer a 401(k) plan include any employee who works more than 1,000 hours in one year (or 500 hours over 3 consecutive years) in their eligibility. For those offering 401(k) plans, the act also allows plan sponsors to offer annuities and other lifetime income options to participants. Auto-enrollment features have also been expanded, with the hope that more individuals would be automatically enrolled in plans at higher retirement savings rates (up to 15% over time).
Notably, the plan also pushes back the age at which individuals must begin taking RMDs, or Required Minimum Distributions, from relevant retirement accounts from age 70 ½ to age 72 for those not yet 70 ½ by the end of 2019. The plan also eliminates age restrictions on contributions, meaning you can now continue contributing to a traditional IRA past the age of 70 as long as you have earned income to contribute.
For those with student loans and those hoping to start a family, the plan also offers expanded use of 529 accounts and certain retirement accounts. You can now use 529 funds for qualified student loan repayments (up to $10,000 max over the course of your lifetime). And 529 funds can also now be used for approved apprenticeship programs. For those considering adding to their family, the law also permits penalty-free withdrawals from an applicable retirement plan such as a 401k or IRA up to $5,000 for the birth or adoption of a child.
To help offset the costs of the SECURE Act, the bill does include provisions that eliminate the use of the stretch IRA which has historically allowed non-spouses inheriting an IRA to stretch out distributions from the inherited account over the course of their lifetimes. Under the new act, inherited IRA funds must be paid out within 10 years of the death of the original owner. Logistically, this will likely result in pushing those who have inherited sizeable IRAs into higher tax brackets as they now have to pay taxes on both their income (likely in their highest earning years as that is often when these types of accounts are inherited) and large distributions from inherited accounts. This provision will also impact the way certain trusts function and you should consider consulting your estate attorney to make sure that your estate plan is still effective, given the new law.
Wherever you’re at on your financial journey, there are likely implications from this new piece of legislation for how you might better save and spend and it’s important to check in with your financial advisor, accountant, estate attorney, and anyone else you may be utilizing to help with your finances to make sure that they are staying appraised of the new rules and making sure that your plan stays in line. If you’d like to dig in and learn more about the SECURE Act, you can find it in full here.
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