The Setting Every Community Up for Retirement Act (SECURE ACT) was approved by the Senate on December 19, 2019, and signed into law by President Trump on December 20, 2019. This legislation is primarily aimed at increasing the use of tax-advantaged accounts and preventing seniors from outliving their assets, but its impact on retirement is far-reaching.
The Secure Act has pushed the age that triggers RMDs from 70 ½ to 72 (for those who are not 70 ½ by the end of 2019), so your retirement fund can grow an extra 1 ½ years before you have to tap into it.
No Age Restrictions on IRA Contributions
You can now continue to stash away money in a traditional IRA if you work into your 70’s or even beyond (there are still no age-based restrictions on contributions to a ROTH IRA).
Students Can Save More
For those pursuing graduate or post-doctoral studies, amounts paid to support these efforts are not treated as compensation for purposes of making IRA contributions, which will enable these students to start saving for retirement sooner. The Secure Act also allows the use of tax-advantaged 529 accounts for qualified student loan repayments up to $10,000 annually.
Incentive for Small Businesses to Create Retirement Plans
- This new legislation provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan (minimum credit of $500 and a maximum credit of $5,000).
- A new $500 tax credit has been created for small businesses that create a 401(k) plan or SIMPLE IRA plan including automatic enrollment. This credit is available for three years.
- Now unrelated small businesses can join forces in a multi-employer plan (MEP) and have a “pooled plan provider” administer it, thereby resulting in lower administration costs.
Increased 401(k) Auto-Enrollment Cap
Many companies use auto-enrollment, so employees are automatically enrolled in their 401(k) plans. A default contribution rate is set (employees have the option to change it or opt-out of doing it altogether). Oftentimes the rate is set at 3% of annual pay with a gradual increase every year. Prior to the Secure Act, the contribution rate of a “qualified automatic contribution arrangement” (QACA) could not exceed 10% for any year. Now, this contribution rate has increased to 15%, except for a worker’s first year of participation.
Expanded “Lifetime Income” Options & Disclosures
The Act encourages employers with retirement savings plans to let employees convert their savings into guaranteed lifetime income via annuities. Employers will be protected from litigation if the insurer selected to make annuity payments doesn’t pay claims in the future.
It also requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants. Statements will need to reflect how much money you could get monthly if your total 401(k) account balance was used to buy an annuity.
Annuities are now portable too. If you leave your job, you can now roll over the 401(k) annuity you had there to another 401(k) or IRA without incurring surrender charges or fees.
Part-Time Employees Participation in 401(k)s
Starting in 2021, the new law guarantees 401(k) plan eligibility for employees who work 1,000 hours throughout the year or have three consecutive years with 500 hours of service (must be 21 years of age by the end of the three-year period and does not apply to collectively bargain plans).
Penalty-Free Withdrawals for Birth/Adoption
Individuals can take up to $5,000 after the birth/adoption of a child without paying the typical 10% early withdrawal penalty. You have one year from the date of the birth/adoption finalization to withdraw the funds without incurring a penalty, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA.
Elimination of “Stretch” IRAs
Starting on January 1, 2020, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the original account owner’s death. Surviving spouses, minor children, disabled, chronically ill, and those not more than ten years younger than the deceased are generally exempt from this ten-year distribution rule.
Credit Card Access to 401(k) Loans Stopped
The Secure Act puts a stop to those 401(k) plan administrators who allow employees to access plan loans by using credit or debit cards.
Although the elimination of “stretch” IRAs didn’t make too many happy, the act includes many positive long-overdue changes that can encourage and make saving for retirement easier. It also opens the door of opportunity to many by expanding the options available.
Give Geier Asset Management a Call Today
We handle the financial planning, investment advisory, and tax guidance for our clients, so a focus on your retirement plan is just another layer of your financial picture that should be integrated and accounted for throughout the year. Call us at (410) 824-1853 to start a conversation or contact Geier Asset Management online.