10 Ways the Secure Act Will Impact Your Retirement Savings
With the decline of traditional pensions, most of us are now
responsible for squirrelling away money for our own retirement. In today's
do-it-yourself retirement savings world, we rely largely on 401(k) plans and
IRAs. However, there are obviously flaws with the system because about
one-fourth of working Americans have no retirement savings at all--including
13% of workers age 60 and older.
But help is on the way. On December 20, 2019, President
Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE)
Act. This new law does several things that will affect your ability to save
money for retirement and influence how you use the funds over time. While some
provisions are administrative in nature or intended to raise revenue, most of
the changes are taxpayer-friendly measures designed to boost retirement
savings. To get you up to speed, we've highlighted 10 of the most notable ways
the SECURE Act affects your retirement savings. Learn them quickly, so you can
start adjusting your retirement strategy right away. (Unless otherwise noted,
all changes apply starting in 2020.)
RMDs Starting at Age 72
Required minimum distributions (RMDs) from 401(k) plans and
traditional IRAs are a thorn in the side of many retirees. (Every year, my
father grumbles about having to take money out of his IRA when he really
doesn't want to.) Until now, RMDs generally had to begin in the year you turn 70½.
(If you work past age 70½, RMDs from your current employer's 401(k) aren't
required until after you leave your job, unless you own at least 5% of the
The SECURE Act pushes the age that triggers RMDs from 70½ to
72, which means you can let your retirement funds grow an extra 1½ years before
tapping into them. That can result in a significant boost to overall retirement
savings for many seniors.
No Age Restrictions on IRA Contributions
Americans are working and living longer. So why not let them
contribute to an IRA longer? That's the thinking behind the SECURE Act's repeal
of the rule that prohibited contributions to a traditional IRA by taxpayers age
70½ and older. Now you can continue to put away money in a traditional IRA if
you work into your 70s and beyond.
As before, there are no age-based restrictions on
contributions to a Roth IRA.
401(k)s for Part-Time Employees
Part-time workers need to save for retirement, too. However,
employees who haven't worked at least 1,000 hours during the year typically
aren't allowed to participate in their employer's 401(k) plan.
That's about to change. Starting in 2021, the new retirement
law guarantees 401(k) plan eligibility for employees who have worked at least
500 hours per year for at least three consecutive years. The part-timer must
also be 21 years old by the end of the three-year period. The new rule doesn't
apply to collectively bargained employees, though.
Penalty-Free Withdrawals for Birth or Adoption of Child
Congratulations if you have a new baby on the way or are
about to adopt a child! Right after you pass out the cigars, you'll probably
start worrying about how you're going to pay for the birthing or adoption
costs. If you have a 401(k), IRA or other retirement account, the new
retirement law lets you take out up to $5,000 following the birth or adoption
of a child without paying the usual 10% early-withdrawal penalty. (You'll still
owe income tax on the distribution, though, unless you repay the funds.) If you're
married, each spouse can withdraw $5,000 from his or her own account,
penalty-free. Although using retirement funds for child birth or adoption
expenses obviously reduces the amount of money available in retirement,
lawmakers hope this new option will encourage younger workers to start funding
401(k)s and IRAs earlier.
You have one year from the date your child is born or the
adoption is finalized to withdraw the funds from your retirement account
without paying the 10% penalty. You can also put the money back into your
retirement account at a later date. Recontributed amounts are treated as a
rollover and not included in taxable income.
If you're adopting, penalty-free withdrawals are generally
allowed if the adoptee is younger than 18 years old or is physically or
mentally incapable of self-support. However, the penalty will still apply if
you're adopting your spouse's child.
Annuity Information and Options Expanded
Knowing how much you have in your 401(k) account is one
thing. Knowing how long the money is going to last is another. Currently,
401(k) plan statements provide an account balance, but that really doesn't tell
you how much money you can expect to receive each month once you retire.
To help savers gain a better understanding of what their monthly
income might look like when they stop working, the SECURE Act requires 401(k)
plan administrators to provide annual "lifetime income disclosure
statements" to plan participants. These statements will show how much
money you could get each month if your total 401(k) account balance were used
to purchase an annuity. (The estimated monthly payment amounts will be for
illustrative purposes only.)
The new disclosure statements aren't required until one year
after the IRS issues interim final rules, creates a model disclosure statement
or releases assumptions that plan administrators can use to convert account
balances into annuity equivalents, whichever is latest.
Speaking of annuities ... the new retirement law also makes
it easier for 401(k) plan sponsors to offer annuities and other "lifetime
income" options to plan participants by taking away some of the associated
legal risks. These annuities are now portable, too. So, for example, if you
leave your job you can roll over the 401(k) annuity you had with your former
employer to another 401(k) or IRA and avoid surrender charges and fees.
Auto-Enrollment 401(k) Plans Enhanced
More companies are automatically enrolling eligible
employees into their 401(k) plans. Workers can always opt out of the plan if
they choose, but most don't. Automatic enrollment boosts overall participation
in employer-sponsored plans and encourages workers to start saving for
retirement as soon as they are eligible.
The employer sets a default contribution rate for employees
participating in an auto-enrollment 401(k) plan. The employee can, however,
choose to contribute at a different rate. For a common type of plan known as a
"qualified automatic contribution arrangement" (QACA), the employee's
default contribution rate starts at 3% of his or her annual pay and gradually
increases to 6% with each year that the employee stays in the plan. However,
under current law, an employer cannot set a QACA contribution rate exceeding
10% for any year.
The SECURE Act pushes the 10% cap on QACA automatic
contributions up to 15%, except for a worker's first year of participation. By
delaying the increase until the second year of participation, lawmakers hope to
avoid having large numbers of employees opt out of these 401(k) plans because
their initial contribution rates are too high. Overall, the change allows
companies offering QACAs to ultimately put more money into their workers'
retirement accounts while keeping the potential shock of higher initial
contribution rates in check.
Help for Small Businesses Offering Retirement Plans
It's simply harder to save for retirement if your employer
doesn't offer a retirement savings plan, because all the work falls to you.
Although most large employers have retirement plans for their workers, the same
can't be said about small businesses. That's why the SECURE Act has three
provisions designed to help more small businesses offer retirement plans for
First, the new law increases the tax credit available for
50% of a small business's retirement plan start-up costs. Before the SECURE
Act, the credit was limited to $500 per year. However, the maximum credit
amount is now up to $5,000.
Second, a brand new $500 tax credit is created for a small
business's start-up costs for new 401(k) plans and SIMPLE IRA plans that
include automatic enrollment. The credit is available for three years and is in
addition to the existing credit described above. The credit is also available
to small businesses that convert an existing retirement plan to an
Third, the SECURE Act makes it easier for small businesses
to join together to provide retirement plans for their employees. Starting in
2021, the new law allows completely unrelated employers to participate in a
multiple-employer plan and have a "pooled plan provider" administer
it. This provision allows unrelated small businesses to leverage economies of
scale not otherwise available to them, which typically results in lower
Grad Students and Care Providers Can Save More
Contributions to a retirement account generally can't exceed
the amount of your compensation. So if you receive no compensation, you
generally can't make retirement fund contributions. Under current law, graduate
and post-doctoral students often receive stipends or similar payments that
aren't treated as compensation and, therefore, can't provide the basis for a
retirement plan contribution. Similar rules and results apply to
"difficulty of care" payments that foster-care providers receive
through state programs to care for disabled people in the caregiver's home.
Under the SECURE Act, amounts paid to aid the pursuit of
graduate or post-doctoral study or research (such as a fellowship, stipend or
similar amount) are treated as compensation for purposes of making IRA
contributions. This will allow affected students to begin saving for retirement
sooner. Similarly, "difficulty of care" payments to foster-care
providers are also considered compensation under the new retirement law when it
comes to 401(k) and IRA contribution requirements.
"Stretch" IRAs Eliminated
Now for some bad news: The SECURE Act eliminates the current
rules that allow non-spouse IRA beneficiaries to "stretch" required
minimum distributions (RMDs) from an inherited account over their own lifetime (and
potentially allow the funds to grow tax-free for decades). Instead, all funds
from an inherited IRA generally must now be distributed to non-spouse
beneficiaries within 10 years of the IRA owner's death. (The rule applies to
inherited funds in a 401(k) account or other defined contribution plan, too.)
There are some exceptions to the general rule, though.
Distributions over the life or life expectancy of a non-spouse beneficiary are
allowed if the beneficiary is a minor, disabled, chronically ill or not more
than 10 years younger than the deceased IRA owner. For minors, the exception
only applies until the child reaches the age of majority. At that point, the
10-year rule kicks in.
If the beneficiary is the IRA owner's spouse, RMDs are still
delayed until end of the year that the deceased IRA owner would have reached
age 72 (age 70½ before the new retirement law).
Credit Card Access to 401(k) Loans Prohibited
There are plenty of potential drawbacks to borrowing from
your retirement funds, but loans from 401(k) plans are nevertheless allowed.
Generally, you can borrow as much as 50% of your 401(k) account balance, up to
$50,000. Most loans must be repaid within five years, although more time is
sometimes given if the borrowed money is used to buy a home.
Some 401(k) administrators allow employees to access plan
loans by using credit or debit cards. However, the SECURE Act puts a stop to
this. The new law flatly prohibits 401(k) loans provided through a credit card,
debit card or similar arrangement. This change, which takes effect immediately,
is designed to prevent easy access to retirement funds to pay for routine or
small purchases. Over time, that could result in a total loan balance the
account holder can't repay.