Did you know that only 56% of the adult workforce participates in a workplace retirement plan? And that oftentimes, those who do are still far behind when it comes to saving for retirement? Vanguard said that the median 401(k) balance for people 65 and older is only $58,035 as of 2019. If you’re looking to catch up, you do have options. We wanted to provide some background on the SECURE Act. With it, you can make more informed decisions when you’re planning your personal returns.
What is the SECURE Act?
The SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, passed the House in July 2019, was approved by the senate in December 2019, and signed into law shortly thereafter. The SECURE Act increases access to tax-advantaged accounts and is designed to prevent older Americans from outliving their assets. It also makes it easier for business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer. With the SECURE Act, many part-time workers are also eligible to participate in an employer retirement plan (conditions for this vary based on your plan).
Here are some of the biggest changes brought about with the SECURE Act:
- Pushed back the age when participants are required to take required minimum distributions (RMD) from 70 ½ to 72.
- Traditional IRA owners can keep making contributions indefinitely
- Mandates that most non-spouses inheriting IRAs take distributions that end up emptying the account within 10 years
- It allows 401(k) plans to offer annuities
- Increases the cap under which participants can be automatically enrolled from 10% of wages to 15%
- Provides a maximum tax credit of $500 per year to ERs who create a 401(k) plan or SIMPLE IRA plan with auto-enroll
- Enables enrollment of part-time workers who either work 1,000 hours during the year or have 3 consecutive years with 500 hours of service
- Allows for the use of 529 accounts for qualified student loan repayments up to $10,000 annually
- This used to be strictly for post-secondary education expenses
- Now it is expanded to include K-12 expenses and pay off college debt after graduation
- Permits penalty-free withdrawals of $5,000 from 401k accounts to “defray” the costs of having or adopting a child
- Allows penalty-free early distributions from some types of retirement accounts for specific circumstances (i.e. expensive medical emergency, purchase health insurance after job loss, birth or adoption of child)
- You can repay the funds as a rollover contribution – you’ll pay income tax on the money if it’s not repaid
The SECURE Act was designed to encourage employers who have previously shied away from retirement plans, due to cost and difficulty to administer, to start offering them. The hope is that with these changes, participation and balances in retirement plans will increase. The provision was so popular that it passed the House by a vote of 417-3.
Inherited IRAs and IRA Contributions
The last thing to consider with the SECURE Act is how things have changed with inherited IRAs and IRA contributions compared to the old rules.
Under the old rules, you could inherit an IRA as a non-spouse beneficiary. You used to be able to withdraw from it over the rest of your life. Now, you are required to take the distributions within 10 years.
Under the old rules, you had to be under 70 ½ to contribute to a traditional IRA. Now, anyone can make traditional IRA contributions. You still need to be able to demonstrate earned income, however. The limit of contributions is $6,000, or $7,000 if you’re 50 or older. If you and your spouse are 71 or older in 2020 and still working, you can each contribute to an IRA in your name ($14,000 total).
The most important thing to remember is that with the SECURE Act, you have options that were not previously available to you. If you have more questions about this, please contact a member of the Chortek team or send us a message!