How the New SECURE Act Will Affect Your Retirement Savings

On December 20, 2019 the SECURE Act became law, affecting millions of Americans saving for their retirement. The law, which stands for Setting Every Community Up For Retirement Enhancement, has several provisions but focuses on just a few core areas of retirement planning:

  1. Changing the rules for required minimum distributions (RMDs)
  2. Expanding access to retirement plans
  3. Increasing options for lifetime income in retirement plans

Below are some important highlights of each area.

  1. Changing the rules for required minimum distributions (RMDs)

For taxpayers who aren’t yet 70 ½ as of December 31, 2019, the new start date for taking RMDs is pushed back to age 72. This allows funds in IRAs or employer-sponsored retirement plans additional time to accrue without the requirement of taking money out and dealing with additional taxes for any distributions. This should be welcome news for anyone nearing retirement and wondering how to plan around the RMDs.

Part of this change also involves Roth IRA conversions. While it is possible to convert a traditional IRA to a Roth, after RMDs are factored in, the process becomes much harder. With RMDs pushed back almost two years, that’s additional time to convert retirement accounts and save on future taxes.

  1. Expanding access to retirement plans

The SECURE Act made it possible to contribute to a traditional IRA after age 70 ½, a valuable change for Americans who still work in their 70s and beyond. There continue to be no age restrictions on Roth IRA contributions.

Another way the SECURE Act expands access to retirement plans is through Multiple Employer Plans (MEPs). MEPs permit small businesses to join together and offer affordable retirement plans for their employees. Small businesses can also take advantage of a new $500 tax credit to offset the start-up costs of a new 401(k) or SIMPLE IRA plan with automatic enrollment, and a higher credit of up to $5,000 for all other new retirement plans.

Part of this change also affects part-time workers who may not have been eligible for an employer-sponsored 401(k) before. As long as the employee has worked at least 500 hours per year for three consecutive years, and is at least age 21, there will be guaranteed access to a 401(k). These changes won’t take effect until 2021, however.

  1. Increasing options for lifetime income in retirement plans

Annuities have been a valuable income-producing tool for retirement; soon, taxpayers with employer-sponsored retirement plans can convert savings into annuities for guaranteed lifetime income. Employers will also be responsible for giving employees a lifetime disclosure statement annually, which will explain how much money could be available per month if the total 401(k) balance were to be used to purchase an annuity.

Other Changes with the SECURE Act

In addition to the above provisions, there are a few other changes to be aware of, including:

  • Beneficiary access to retirement plan funds and RMDs – effectively eliminating the non-spouse “stretch” RMDs for inherited accounts
  • The ability to withdraw up to $5,000 from a retirement account, penalty-free, for the birth or adoption of a child
  • Automatic enrollment for 401(k) plans
  • Graduate school stipends and other compensation now eligible for IRA contributions
  • Access to employer-sponsored retirement plan loans via a credit card is now prohibited

Now more than ever, it’s important to review retirement plan accounts, fund allocations, and beneficiaries. For questions on retirement planning for you, your family, or the retirement plans your business offers, contact Naden/Lean today.