The SECURE Act Has Passed. What Does it Mean for Your Retirement?
In July of 2019, the House passed a new bill titled the “Setting Every Community Up for Retirement Enhancement Act,” or SECURE Act.1 The Senate approved the bill on December 19, 2019, and it was signed into law on December 20th.
The new legislation provides a mixed bag of incentives and obligations for retirement savers. Its intent is to make it easier for families to ultimately save more for retirement. Below we’re outlining prominent changes of this new act and how they may affect your own retirement.
Change #1: Minimum Distribution Age For Retirement Accounts
Previously, when someone reached age 70½, they were required to begin withdrawing money from their retirement accounts. The SECURE Act has adjusted this minimum distribution age to 72.1 This allows your retirement accounts to mature for an additional year and a half. Depending on how much you have accumulated thus far, this additional 18 months could have a significant impact on your retirement savings and retirement and cash flow planning.
Change #2: Required Withdraw Timeline From Inherited Retirement Accounts
Under the new act, beneficiaries who have inherited a retirement account will be required to withdraw the amount in its entirety within 10 years of receiving the account. Previously, inheritors were given the opportunity to withdraw the amount over their life expectancy. With this change, there’s the possibility your tax obligation could go up since you are required to withdraw more from the account over a shorter period of time. There are certain groups of people who are exempt from this rule:
- Spouses of the deceased
- Beneficiaries who are disabled or chronically ill
- Certain minors (those children of the original retirement account owner). But only until they reach the age of majority.
- Individuals who are not more than 10 years younger than the decedent1
Change #3: Eliminating the Age Limitations on Contributing to IRAs
Previously, individuals were not eligible to contribute to their traditional IRA once they reached age 70½. Now, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The SECURE act has eliminated the previous age cap, allowing people to continue contributing to their IRA for as long as they continue working.1
This change is great news for seniors and could make a significant impact on their retirement savings, considering that more and more Americans 55 and older are making up a significant portion of the workforce. Today, 23.1 percent of the workforce consists of those 55 and older, compared to just 18.1 percent in 2008. And according to the U.S. Census Bureau, that percentage is projected to continue increasing to 25 percent by 2028.2
Change #4: 401(k) Eligibility For Part-Time Workers
Before the SECURE Act, employees were required to work 1,000+ hours for an employer in order to be eligible to participate in a 401(k). Congress has recognized how important it is for all workers to participate in employer-provided retirement plans, and so the SECURE Act includes additional provisions to help employers encourage their employees to increase contributions and to let (some) part-time employees participate when they were previously ineligible to do so.
In order to be eligible, part-time employees will have to have worked 500+ hours per year for an employer (which averages out to 9.6 hours a week) for the past three consecutive years. In addition, the employee must be 21 years of age or older by the end of those three years.1
These changes for part-time workers apply to plan years beginning in 2021, but the SECURE Act does not require an employer to start ‘counting’ 500-hour years for the purposes of this new rule until 2021. That means that the earliest an employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.
While there are additional changes being proposed in this new act, above are a few of the most impactful ways in which Congress’s SECURE Act could be making a difference in how you save for retirement. Please let us know how we can help ensure your desired retirement takes optimal advantage of these new rules.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.