The rules for tax-deferred retirement accounts are changing as of January 1st. A new law called the SECURE Act takes effect on January 1st. It was signed into law by President Trump as part of the 2020 government spending bill. Investment advisers say it will allow more U.S. workers to participate in these plans. There’s also a bit of bad news for people who will inherit an IRA.
The SECURE Act of 2019 is a bipartisan bill that stands for “Setting Every Community Up for Retirement Enhancement.“ (1) It is the latest version of several retirement policy bills that haven’t been passed, and the first major improvement for tax-deferred accounts in many years.
The SECURE Act of 2019
It is designed to increase participation in these kinds of plans, and to hopefully provide more financial security for retirees. It passed the House last Spring and then went to the Senate, where it was attached to the 2020 government spending bill. It became law with President Trump’s signature, just before Christmas.
The SECURE Act includes some significant improvements to retirement rules, although some experts say they are not earth-shattering. But they will help address the retirement savings crisis that has been growing in the U.S.
As reported by Investopedia, and the U.S. Bureau of Labor Statistics, just 55% of working adults are participating in a retirement plan. (2) And for those who are participating, many are not contributing enough to their plans, and falling behind on what they need to save for a secure retirement. A Vanguard study shows that the median 401k balance for people 65 years of age and older is just $58,000. That’s a far cry from the $1 million that some experts encourage for a comfortable retirement.
Representative Richard Neal of Massachusetts said in a statement, “With the passage of the bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures.”
SECURE Act Highlights
Let’s take a look at some of the changes.
- The legislation makes it possible for long-term part-time employees to participate in a workplace retirement plan. They can qualify by working at least 1,000 hours during the year, or a minimum of 500 hours per year for three consecutive years.
- It also makes it easier for small employers to band together for the creation of 401K plans, and to create “safe harbor” plans. With a safe harbor 401k, the employer agrees to a mandatory contribution despite the participation of an employee. That makes it possible to automatically enroll employees and avoid costly testing requirements and administrative fees. Employers also get a tax credit for safe harbor plans.
- The SECURE Act also encourages the use of annuities as an option for workplace plans. That is accomplished by reducing the liability that employers face if the annuity provider fails to meet its obligation.
- It allows for a penalty-free early withdrawal of $5,000 to help with the cost of adopting a child.
- And it does two things for retirees. It removes the cap on contributions, so individuals who continue working may also continue contributing to their plans.
- It also increases the age at which plan retirees must begin their required minimum distributions, or RMDs. The old rules force retirees to start taking distributions at age 70.5. The new rules increase that age to 72. You must turn 70-and-a-half in 2020 to fall under the new rules.
- Graduates also get a perk. The legislation allows the use of funds from a tax-advantaged education plan, or 529 plan, to pay back college loans — up to $10,000 a year.
Elimination of Stretch IRA
To help pay for these changes, lawmakers removed a feature that many individuals make use of in their estate plans. They eliminated the so-called “stretch IRA.” That’s when someone, who’s not a spouse, inherits an IRA and is allowed to stretch the distributions over their own lifetime. That would help them avoid taxes by taking smaller amounts each year over a longer period of time.
Lawmakers felt that heirs should be limited to just 10 years for a full distribution of any inherited account. There are no distribution requirements for each of those ten years, but the entire account must be distributed by the tenth year.
This one change is expected to raise almost $16 billion in taxes. It is not retroactive, so it only applies to people who pass away in 2020 or later.
Step in the Right Direction
Retirement planner Marguerita Cheng of Blue Ocean Global Wealth told Investopedia that the bill is not a complete answer to the nation’s retirement shortfall. She says, it’s a step in the right direction. She feels that the provision for part-time employees will be helpful, along with the use of funds to help pay back student loans.
Increasing the age for RMDs will also help people “make their money last just a little bit longer,” according to L.A. financial planner, David Rae. He says, that’s especially important now, for people who also continue working later in life.
While these are all improvements to the way that U.S. consumers save for retirement, nothing beats real estate investing for financial security. It’s important to maximize whatever you are doing to save for the future, so these changes will help many people. If you want to take your retirement planning a step further, look into real estate.