The SECURE Act - The Details You Need To Know Today
President Trump signed the SECURE Act this week as part of the government’s spending bill and it will inevitably affect most retirement savers, for better or worse.
The SECURE legislation — which stands for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions intended to strengthen retirement security across the country.
Here’s what the bill includes, and what that means for current savers and future retirees:
Annuities in 401(k) plans
Currently, employers hold the fiduciary responsibility to ensure these products are appropriate for employees’ portfolios, but under the new rules, the onus falls on insurance companies, which sell annuities, to offer proper investment choices.
Increasing the required minimum distribution age — and contribution age
Previously, qualified account holders such as those with a 401(k) or IRA had to withdraw required minimum distributions (RMD) in the year they turned age 70.5. The bill also eliminates the maximum age for traditional IRA contributions, which was previously capped at 70.5 years old. Americans who turned 70.5 years old in 2019 will still need to withdraw their required minimum distributions this year, and failure to do so results in a 50% penalty of their RMD.
No more stretch IRAs
Under the current law, beneficiaries who did not inherit their accounts from a husband and wife are in some cases allowed to withdraw required minimum distributions for the span of their lives, which could be a few years, or a few decades. The amount of the distribution is calculated based on a few factors, including life expectancy and beneficiary age.
The SECURE Act requires beneficiaries withdraw all assets of an inherited account within 10 years. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year.
Multiple employer plans for small businesses
Under the SECURE Act, employers no longer have to share “a common characteristic,” such as being in the same industry. “As employers pool together, they will enjoy the economy of scale, which is access to more features at affordable prices,” Cary said. “It does enable employers to help their employees in a big way.”
Employer-sponsored retirement plans would also be available to long-term part-time workers, with a lower minimum number of hours worked. Previously, employers did not have to invite workers who clock less than 1,000 hours every year to participate in a retirement plan, but the SECURE Act drops the threshold for eligibility down to either one full year with 1,000 hours worked or three consecutive years of at least 500 hours.
Using Retirement Money Following Birth or Adoption for Costs
One provision would allow parents to withdraw up to $5,000 from their individual 401(k) or similar workplace plan for each newborn without incurring a 10 percent additional tax for early retirement plan distributions. However, they will still have to pay ordinary income taxes on the withdrawal, which has to be done within a year of the birth or adoption of a child. Parents can later put the money back into their retirement accounts.
529’s Can Now be Used for Student Loans
More widespread usage of 529 plans, particularly after students have already graduated. The SECURE Act permits $10,000 to be taken (over the beneficiary's lifetime) from a 529 plan as a qualified distribution if the funds are used to repay qualifying student loans.
An uptick in 529 beneficiary changes, especially in larger families, since the SECURE Act extends the $10,000 lifetime student loan benefit to not only the beneficiary but his/her siblings as well. This may be taken advantage of through the generous provisions that already exist for 529 plans allowing for flexible beneficiary changes to other family members.
Sources
Washington Post: https://www.washingtonpost.com/business/2019/12/23/new-law-is-bringing-big-changes-retirement-savers-especially-parents/
TheStreet: https://www.thestreet.com/retirement/secure-retirement-act-makes-big-changes-to-how-you-save
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