In December of 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The reforms are designed to make saving for retirement easier and more accessible for Americans. Is that the reality? In this blog, Your Credit Union breaks down everything you need to know about the SECURE Act and how these changes may affect you.
Required Minimum Distributions (RMDs) Now Begin at Age 72
One important change is that individuals will no longer be required to withdraw from IRAs and 401(k)s at age 70 ½. Under the new law, RMDs now begin at age 72 for those who turn 70 ½ in the calendar year 2020. If you fall into this group, it could be valuable to meet with your financial planner to reconsider your withdrawal plans. If you turned age 70 ½ in 2019 and have already begun taking your RMDs, you should generally continue to do so. The IRS may provide further guidance on this point, so talk with your tax advisor about any 2020 distributions.
You Can Make IRA Contributions Beyond Age 70 ½
One reality the SECURE Act seeks to address is that people are living longer now, and many work past their traditional retirement age. Under the Act, you can continue to contribute to your Traditional IRA past age 70 ½ as long as you are still working. As a result of this, the rules for traditional IRAs will align more closely with 401(k)s and Roth IRAs.
Long-Term, Part-Time Employees Will Be Able to Join Their Company’s 401(k) Plan
Up until now, if you worked less than 1,000 hours per year, you were generally not eligible to participate in your company’s 401(k) plan. Except in the case of collectively bargained plans, the law now requires employers maintaining a 401(k) plan to offer one to any employee who worked more than 1,000 hours in one year, or 500 hours over three consecutive years. If this applies to you, talk with your Human Resource Department about how to enroll in your company’s 401(k) plan.
Inherited IRA Distributions Generally Must Now Be Taken Within 10 Years
Prior to the passage of the act, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy. The new law requires many beneficiaries to withdraw from an inherited IRA or 401(k) plan within ten years following the death of the account holder. This applies to IRAs inherited from original owners who have passed away on or after January 1, 2020. However, there are some exceptions to this rule—beneficiaries who are a surviving spouse, a minor child, a disabled or chronically ill person and beneficiaries who are less than ten years younger than the original IRA owner or 401(k) participant may not be affected by the new law. You Can Withdraw Up to $5,000, Per Parent, Penalty-Free from Your Retirement Plan Upon the Birth or Adoption of a Child The new law allows an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA. The 10% early withdrawal fee will not apply to these withdrawals, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA. This could be a worthwhile option for those who don’t have adequate personal savings to fully fund the birth or adoption of a child.
529 Funds Can Now Be Used to Help Pay Student Loan Debt
In some situations, families may have money remaining in their college savings plans after their student graduates. The new law allows them to use a 529 Savings Account to pay up to $10,000 in student debt over the course of the student’s lifetime. Money from this account can also be used to pay for certain apprenticeship programs. You Can Contribute Up to 15% of Your Pay to Your Retirement Savings Plan The SECURE Act encourages retirement saving by raising the limit for auto enrollment contributions in employer-sponsored retirement plans from 10% of pay to 15%. If your employer’s plan offers auto enrollment, the amount withheld for your retirement savings could go up every year until you’re contributing 15% of your pay to your retirement savings plan. It also allows “lifetime income investment” to be distributed from your workplace retirement plan. The retirement income options are portable, so if you left your job, you could roll over this lifetime investment to another 401(k) or IRA.
Required Lifetime Disclosure Statements
Finally, the SECURE Act requires “lifetime disclosure statements.” These statements show how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity. The disclosures allow you and your financial advisor to better determine what your potential income will be throughout retirement.
Your Credit Union Can Help You Navigate the SECURE Act
Changes in the tax code, family relationships and your own financial circumstances are common and require you to update your planning strategy. Please feel free to contact a Member Services Representative if you have questions about your existing IRA or would like information about opening a Retirement Savings Account with us. We’re your Credit Union…owned by you and working for you!