In December, the SECURE Act or Setting Every Community Up for Retirement Enhancement Act, was signed into law. This bill brings about some of the biggest changes in short-term retirement policy history and is aimed at strengthening retirement security for all Americans.
The SECURE Act was constructed in hopes of increasing access to tax-advantage accounts and preventing American workers from outliving their retirement savings. Having gone into effect on January 1, 2020, we wanted to explain what changes are included in the bill and their impact on retirement planning.
These are the key takeaways:
- Small businesses and 401(k)s - Many small businesses shy away from offering employer-sponsored retirement accounts because they can be expensive and challenging to administer. With the intention of eliminating these two hurdles, the SECURE Act tweaks a number of rules related to these types of tax-advantage accounts and offers tax incentives to small businesses for offering them to their employees.
- Part-time employees - Employer-sponsored retirement accounts have only been available to workers legally classified as an employee, which is designated as one full year of 1,000+ hours worked. With the passing of this bill, businesses are now able to broaden the scope of those eligible by offering 401(k)s to part-time employees who have three consecutive years of 500+ hours worked.
- Delayed Required Minimum Distributions (RMDs) - RMDs are the amount of money that the IRS requires investors to withdrawal from their qualified retirement plans upon reaching the age of 70½. In an effort to allow retirement funds to grow a little bit longer and eliminate the tax burden on distributions for another year and a half, the SECURE Act pushes back the age for which people need to take RMDs from 70½ to 72.
- 529 plan flexibility - The SECURE Act allows investors to make up to $10,000 a year in student loan repayments using money in a tax-advantaged 529 account. This allows parents who have money remaining in a college fund to help a child that has already graduated.
- Penalty-free 401(k) withdrawals - The option for investors to withdrawal up to $5,000 from a 401(k) penalty-free to help cover some of the expenses of having or adopting a child.
- Elimination of the stretch IRA provision - The stretch IRA provision of the past allowed non-spousal beneficiaries to gradually spread out their account distributions over the course of their lifetime. However, the SECURE Act now requires all non-spousal beneficiaries of IRAs to take a full payout from the inherited IRA within 10 years of the death of the original account holder which can have a big impact on beneficiaries given the tax burden the distributions can cause. This rule change only applies to heirs of account holders who pass away in 2020 or later.
- Annuities in 401(k) plans - There’s a provision in the SECURE Act that makes it easier for employers to offer annuities in their 401(k) plans. The upside to this is that annuities can be structured in a way that attains long-term income objectives for retirees. On the flip side, investors need to look meticulously at annuity providers and the fees associated with each to make sure they’re truly a good match.
While the overall intention of the SECURE Act is a positive one and should allow more Americans to accumulate more money in their retirement nest egg, the removal of the stretch IRA provision and the offering of annuities in investor-lead accounts can present considerations to be aware of for some retirement plans.