SECURE Act: 7 Impacts to Retirement Savings

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By Al Chingren - January 2020

Think you’ve got your retirement plan set? Recent rule changes from Congress should prompt you to give your retirement accounts another look.

Passed in late December with bipartisan support, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is the most sweeping retirement bill in more than a decade.

The Retirement Rules Have Changed

The goal of the SECURE Act was to strengthen Americans’ security in retirement. But as with all legislation, it comes with pros and cons, depending on your situation. Most people may experience some impact from these changes, particularly those at, or near, retirement—so it’s important to review the new rules. Most provisions were effective Jan. 1, 2020.

NEW RETIREMENT RULES EVERYONE SHOULD KNOW

1. Required distribution age increased to 72

Age 70½ has long been a milestone for investors, as that was the trigger for required minimum distributions (RMDs) from traditional IRA accounts and non-Roth retirement plans. If you were born on or after July 1, 1949, the age has been changed to 72. Now you’ll have more time for your investments to potentially grow before taking withdrawals.

 

If you already turned 70½ in 2019, you’ll continue taking RMDs on your current schedule.

2. No more age limits for IRA contributions

Previously, you had to stop making tax-deductible IRA contributions the year you turned 70½. The removal of the age limit means you can continue adding money to your IRA—as long as it's earned income.

 

The rule applies to anyone who has earned income—no matter your age or whether you’d already stopped contributing. But it only applies from January 1, 2020, going forward. People over 70.5 cannot make a retroactive 2019 contribution.

3. Stricter deadline on inherited IRA and Retirement accounts

Many IRA and retirement account beneficiaries must now withdraw the money from their inherited accounts within 10 years of the death of the account owner that occurs on or after January 1, 2020. This eliminates the “stretch” IRA strategy, in which an IRA owner could name a much younger beneficiary, delaying taxable withdrawals for a much longer period.

 

Beneficiaries of an IRA or retirement account whose owner died on or before Dec. 31, 2019, are exempt from the change, as are most surviving spouses, minor children of the account owner and beneficiaries less than 10 years younger than the deceased owner.

MORE CHOICES FOR FAMILIES AND COLLEGE SAVINGS

4. Penalty-free withdrawals of $5K for birth/adoption expenses

Parents can withdraw up to $5,000 from IRAs and 401(k) accounts (if permitted by their employer’s plan), penalty-free, to pay for the costs associated with the birth or adoption of a child.

5. 529 money available for student loans and apprenticeships

The SECURE Act expands the scope of 529 education savings plan expenses. Beneficiaries can use money from their 529 accounts to pay back up to a lifetime maximum of $10,000 in qualified student loans and also to pay for apprenticeship program expenses.

 

While this rule isn’t specifically related to retirement, it may help former students pay down loans faster and provide a boost to financial stability.

OTHER RETIREMENT OPTIONS AT WORK

6. Employer plans for part-timers

While most employers allow only full-time workers to contribute to retirement plans, the SECURE Act will expand that benefit in 2021 to certain part-time employees.

 

Plans may still require a minimum age, a minimum number of annual hours worked and years of service for part-timers to qualify.

7. Annuities may be a choice in employer plans

In addition to traditional investment options, employees may be able to direct retirement savings into “guaranteed lifetime income” vehicles, or annuities. This rule takes effect Jan. 1, 2020, but even if your employer adds this option, it may take a few years to implement.

 

Annuities are offered through insurance companies, and your employer may not be liable if the insurer stops paying claims in the future.

Coming Soon: Retirement Progress Report

Another upcoming SECURE Act change is a requirement for retirement plans to provide a “progress report” to employees. The report will show employees’ potential future retirement income based on their current savings and contributions.

Although this provision is still in the works, the goal is for employers to provide data, facts and support to help employees plan for their future savings goals.

Next Steps

It’s always a good idea to review your retirement plans regularly. Decisions made years ago may need to be revised anyway, so it’s time to review your accounts carefully with the SECURE Act rules in mind.

The IRA age changes and beneficiary updates may have the most visible impact on your retirement savings:

  • Make sure you review your planned RMD withdrawals and apply the new rules to your IRA accounts.
  • If you still have earned income, take advantage of the extra time to contribute to your IRA.
  • Be sure to consider current beneficiary designations to determine whether the shorter withdrawal window detracts from any of your previous financial plans for your heirs.

For more specific information on the new rules and for continued updates, visit www.irs.gov .

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Al Chingren
Al Chingren
VP, Personal Finance
Retirement Solutions
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