You would think that President Donald Trump has had a lot on his mind over the past three or four months, what with all the election news, the coronavirus, and let’s not forget that pesky impeachment thing. But obviously in the midst of all this political chaos he still found time to sign the Setting Every Community Up for Retirement Enhancement (SECURE) Act, all designed to and modernize our country’s retirement system.
The law focuses on retirement planning in three key areas: 1) modifying required minimum distribution rules for retirement plans; 2) expanding retirement plan access and 3) increasing lifetime income options in retirement plans.
The most immediate impact of the bill will be felt by those nearing or in retirement. Which means if you’re in your 50s or 60s, consider this a “heads-up.” And since most of its provisions kick-in this year, it would appear that now is a good time to look at the key influencing factors that this new legislation could have on those retirement plans.
- The clock has started on inherited IRA distributions, which now must be taken within 10 years. Prior to 2020, if you inherited an IRA or 401(k), you could “stretch” your distributions over your lifetime. Well, that now only works if you pass away 10 years or less after you receive your inheritance, which would be a bummer if you are only, say, 30 years old. Under the new law, “stretch” IRAs no longer have that flexibility and you are required to withdraw those funds within 10 years following the death of the account holder. Surviving spouses, minor children and those not more than 10 years younger than the deceased, however, are generally exempt from this new SECURE Act 10-year distribution rule. This means it’s now very important to review the beneficiary designations of your retirement accounts to make sure they align with the new beneficiary rules.
- Required minimum distributions (RMDs) age increased to 72 from 70 ½, effective to those reaching age 70 ½ after December 31, 2019. Americans are working longer and can now defer withdrawing until age 72. If you turned 70 ½ last year and have already began withdrawals, the new rule does not impact you.
- No more age restrictions on IRA contributions. The good news is Americans are living longer. The bad news is that Americans are now working longer. Americans working past the traditional retirement age are now able to contribute indefinitely. So as long as you are still taking home a paycheck, even when you hit 70-years old, you can still contribute to your traditional IRA past age 70 ½.
- Long-term part-time workers can now participate in 401(k) plans. The new act expands access allowing part-timers who have worked 500 hours at the job over three consecutive years to be participants in 401(k) plans. For example, a part-time worker who logs in a steady 30 hours a week at the local donut shop will be eligible to participate in a retirement plan in less than five months. Of course, if you only work three hours a week it will take you over three years to be eligible. Your choice.
- Make it easier for companies to offer retirement plans. Small businesses that don't offer retirement plans will be able to join other businesses to create multiple employer plans, or MEPs. These plans should be cheaper for small companies, because they can share administrative costs. The bill also will give a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
The SECURE Act is widely considered to be the biggest set of retirement reforms in more than a decade. As rules on retirement changes, your approach to retirement planning should, too. When it comes to playing the retirement benefits game, Washington is always moving the goal posts. This is probably an opportune time to make sure your financial partner is giving you an accurate and updated play-by-play as things change.