10 ways the new SECURE Act affects your retirement savings
With the decline of traditional pensions, most of us
are now responsible for squirrelling away money for
our own retirement. In today's do-it-yourself retirement
savings world, we rely largely on 401(k) plans and
IRAs. However, there are obviously flaws with the
system because about one-fourth of working
Americans have no retirement savings at all--including 13% of workers age 60 and older.
But help is on the way. On December 20, 2019,
President Trump signed the Setting Every Community
Up for Retirement Enhancement (SECURE) Act. This
new law does several things that will affect your ability
to save money for retirement and influence how you
use the funds over time. While some provisions are
administrative in nature or intended to raise revenue,
most of the changes are taxpayer-friendly measures
designed to boost retirement savings. To get you up
to speed, we've highlighted 10 of the most notable
ways the SECURE Act affects your retirement
savings. Learn them quickly, so you can start
adjusting your retirement strategy right away. (Unless
otherwise noted, all changes apply starting in 2020.)
1. RMDs starting at age 72
Required minimum distributions (RMDs) from 401(k)
plans and traditional IRAs are a thorn in the side of
many retirees. Right now, RMDs generally must
begin in the year you turn 70½. (If you work past age
70½, RMDs from your current employer's 401(k)
aren't required until after you leave your job, unless
you own at least 5% of the company.)
The SECURE Act pushes the age that triggers RMDs
from 70½ to 72, which means you can let your
retirement funds grow an extra 1½ years before
tapping into them. That can result in a significant
boost to overall retirement savings for many seniors.
2. No age restrictions on IRA contributions
Americans are working and living longer. So why not
let them contribute to an IRA longer? That's the
thinking behind the SECURE Act's repeal of the rule
that prohibited contributions to a traditional IRA by
taxpayers age 70½ and older. Now you can continue
to put away money in a traditional IRA if you work into
your 70s and beyond.
As before, there are no age-based restrictions on
contributions to a Roth IRA.
3. 401(k)s for part-time employees
Part-time workers need to save for retirement, too.
However, employees who haven't worked at least
1,000 hours during the year typically aren't allowed to
participate in their employer's 401(k) plan.
That's about to change. Starting in 2021, the new
retirement law guarantees 401(k) plan eligibility for
employees who have worked at least 500 hours per
year for at least three consecutive years. The part-timer
must also be 21 years old by the end of the
three-year period. The new rule doesn't apply to
collectively bargained employees, though.
4. Penalty-free withdrawals for birth or adoption of child
Congratulations if you have a new baby on the way or
are about to adopt a child! Right after you pass out
the cigars, you'll probably start worrying about how
you're going to pay for the birthing or adoption costs.
If you have a 401(k), IRA or other retirement account,
the new retirement law lets you take out up to $5,000
following the birth or adoption of a child without
paying the usual 10% early-withdrawal penalty. (You'll
still owe income tax on the distribution, though, unless
you repay the funds.) If you're married, each spouse
can withdraw $5,000 from his or her own account,
penalty-free. Although using retirement funds for child
birth or adoption expenses obviously reduces the
amount of money available in retirement, lawmakers
hope this new option will encourage younger workers
to start funding 401(k)s and IRAs earlier.
You have one year from the date your child is born or
the adoption is finalized to withdraw the funds from
your retirement account without paying the 10%
penalty. You can also put the money back into your
retirement account at a later date. Recontributed
amounts are treated as a rollover and not included in
If you're adopting, penalty-free withdrawals are
generally allowed if the adoptee is younger than 18
years old or is physically or mentally incapable of selfsupport.
However, the penalty will still apply if you're
adopting your spouse's child.
5. Annuity information and options expanded
Knowing how much you have in your 401(k) account
is one thing. Knowing how long the money is going to
last is another. Currently, 401(k) plan statements
provide an account balance, but that really doesn't tell
you how much money you can expect to receive each
month once you retire.
To help savers gain a better understanding of what
their monthly income might look like when they stop
working, the SECURE Act requires 401(k) plan
administrators to provide annual "lifetime income
disclosure statements" to plan participants. These
statements will show how much money you could get
each month if your total 401(k) account balance were
used to purchase an annuity. (The estimated monthly
payment amounts will be for illustrative purposes
The new disclosure statements aren't required until
one year after the IRS issues interim final rules,
creates a model disclosure statement or releases
assumptions that plan administrators can use to
convert account balances into annuity equivalents,
whichever is latest.
Speaking of annuities ... the new retirement law also
makes it easier for 401(k) plan sponsors to offer
annuities and other "lifetime income" options to plan
participants by taking away some of the associated
legal risks. These annuities are now portable, too. So,
for example, if you leave your job you can roll over the
401(k) annuity you had with your former employer to
another 401(k) or IRA and avoid surrender charges
6. Auto-enrollment 401(k) plans enhanced
More companies are automatically enrolling eligible
employees into their 401(k) plans. Workers can
always opt out of the plan if they choose, but most
don't. Automatic enrollment boosts overall
participation in employer-sponsored plans and
encourages workers to start saving for retirement as
soon as they are eligible.
The employer sets a default contribution rate for
employees participating in an auto-enrollment 401(k)
plan. The employee can, however, choose to
contribute at a different rate. For a common type of
plan known as a "qualified automatic contribution
arrangement" (QACA), the employee's default
contribution rate starts at 3% of his or her annual pay
and gradually increases to 6% with each year that the
employee stays in the plan. However, under current
law, an employer cannot set a QACA contribution rate
exceeding 10% for any year.
The SECURE Act pushes the 10% cap on QACA
automatic contributions up to 15%, except for a
worker's first year of participation. By delaying the
increase until the second year of participation,
lawmakers hope to avoid having large numbers of
employees opt out of these 401(k) plans because
their initial contribution rates are too high. Overall, the
change allows companies offering QACAs to
ultimately put more money into their workers'
retirement accounts while keeping the potential shock
of higher initial contribution rates in check.
7. Help for small businesses offering retirement plans
It's simply harder to save for retirement if your
employer doesn't offer a retirement savings plan,
because all the work falls to you. Although most large
employers have retirement plans for their workers, the
same can't be said about small businesses. That's
why the SECURE Act has three provisions designed
to help more small businesses offer retirement plans
for their employees.
First, the new law increases the tax credit available
for 50% of a small business's retirement plan start-up
costs. Before the SECURE Act, the credit was limited
to $500 per year. However, the maximum credit
amount is now up to $5,000.
Second, a brand new $500 tax credit is created for a
small business's start-up costs for new 401(k) plans
and SIMPLE IRA plans that include automatic
enrollment. The credit is available for three years and
is in addition to the existing credit described above.
The credit is also available to small businesses that
convert an existing retirement plan to an autoenrollment
Third, the SECURE Act makes it easier for small
businesses to join together to provide retirement
plans for their employees. Starting in 2021, the new
law allows completely unrelated employers to
participate in a multiple-employer plan and have a
"pooled plan provider" administer it. This provision
allows unrelated small businesses to leverage
economies of scale not otherwise available to them,
which typically results in lower administrative costs.
8. Grad students and care providers can save more
Contributions to a retirement account generally can't
exceed the amount of your compensation. So if you
receive no compensation, you generally can't make
retirement fund contributions. Under current law,
graduate and post-doctoral students often receive
stipends or similar payments that aren't treated as
compensation and, therefore, can't provide the basis
for a retirement plan contribution. Similar rules and
results apply to "difficulty of care" payments that
foster-care providers receive through state programs
to care for disabled people in the caregiver's home.
Under the SECURE Act, amounts paid to aid the
pursuit of graduate or post-doctoral study or research
(such as a fellowship, stipend or similar amount) are
treated as compensation for purposes of making IRA
contributions. This will allow affected students to
begin saving for retirement sooner. Similarly,
"difficulty of care" payments to foster-care providers
are also considered compensation under the new
retirement law when it comes to 401(k) and IRA
9. "Stretch" IRAs eliminated
Now for some bad news: The SECURE Act eliminates
the current rules that allow non-spouse IRA
beneficiaries to "stretch" required minimum
distributions (RMDs) from an inherited account over
their own lifetime (and potentially allow the funds to
grow tax-free for decades). Instead, all funds from an
inherited IRA generally must now be distributed to
non-spouse beneficiaries within 10 years of the IRA
owner's death. (The rule applies to inherited funds in
a 401(k) account or other defined contribution plan,
There are some exceptions to the general rule,
though. Distributions over the life or life expectancy of
a non-spouse beneficiary are allowed if the
beneficiary is a minor, disabled, chronically ill or not
more than 10 years younger than the deceased IRA
owner. For minors, the exception only applies until the
child reaches the age of majority. At that point, the 10-year rule kicks in.
If the beneficiary is the IRA owner's spouse, RMDs
are still delayed until end of the year that the
deceased IRA owner would have reached age 72
(age 70½ before the new retirement law).
10. Credit card access to 401(k) loans prohibited
There are plenty of potential drawbacks to borrowing
from your retirement funds, but loans from 401(k)
plans are nevertheless allowed. Generally, you can
borrow as much as 50% of your 401(k) account
balance, up to $50,000. Most loans must be repaid
within five years, although more time is sometimes
given if the borrowed money is used to buy a home.
Some 401(k) administrators allow employees to
access plan loans by using credit or debit cards.
However, the SECURE Act puts a stop to this. The
new law flatly prohibits 401(k) loans provided through
a credit card, debit card or similar arrangement. This
change, which takes effect immediately, is designed
to prevent easy access to retirement funds to pay for
routine or small purchases. Over time, that could
result in a total loan balance the account holder can't
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