On December 19th, 2019, the U.S. Senate approved a bill called the Setting Every Community Up for Retirement Enhancement Act or the SECURE Act which became law on January 1st, 2020. This bill includes significant provisions to improve the state of retirement security for all Americans by helping you gain increased access to tax-advantaged accounts and prevent you from outliving your assets. The SECURE Act affects defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) as well as 529 plans that have been designed to pay for our children’s education. This has been the most important legislative change to the retirement system since the Pension Protection Act was passed in 2006.
Motivation Behind The SECURE Act
Unfortunately, according to a November 2019 Bankrate survey, over half of the workforce in the U.S. reported that they’re behind on their retirement contributions. In addition, a survey from May 2019, also conducted by Bankrate, found that almost 20% of American adults aren’t saving at all for their retirement. According to financial advisors, one of the most effective ways to encourage individuals to save for retirement is to provide them with workplace retirement plans. Therefore, the goal of the SECURE Act is to provide American workers with opportunities to save for their retirement and hopefully maintain the quality of life they have become accustomed to.
A List of the most significant changes to retirement planning due to the SECURE Act:
- Small Businesses(SMBs) can increase the cap from 10% of the wages to 15% when setting up 401(k)s under which they can automatically enroll workers in “safe harbor” retirement plans.
- Long-term part-time employees are eligible for 401(k) plans.
- The required minimum distribution (RMD) age has increased to 72 instead of 70½.
- IRA contributions can be made indefinitely if you are working since the top age limit has been removed.
- Non-spouse inherited retirement account distributions must be completely withdrawn within 10 years.
- New parents can take penalty-free withdrawals of $5,000 to cover the costs of having or adopting a child.
- 401(k) plans can now offer annuities.
What It Means For Small Businesses
The SECURE Act can change how SMBs deal with retirement planning by enabling them to access new retirement tax plan incentives that are less expensive and easier to administer. For example, SMBs can take advantage of tax credits to set up automatic enrollment in retirement plans for all small business employees or give them the opportunity to join Multiple Employer Plans (MEP) and Pooled Employer Plans (PEP). In effect, small businesses can join forces to offer retirement accounts to their employees. SMBs will not have out-of-pocket expenses for establishing 401(k) plans for their employees and as a result will attract new employees and retain current ones.
Including Part-Time Employees In 401(K) Plans
Another provision of the SECURE Act is to permit long-term part-time employees to participate in 401(k) plans. The Act stipulates that part-time employees who have worked at least 500 hours for three consecutive years and meet the minimum age requirement for eligibility to participate (21 years of age), must have the opportunity to participate in such plans if they wish. Part-time employees who work 1,000 hours throughout the year are, of course, still able to participate just as they were prior to the Act. Employers have been given some time to prepare for this provision as it goes into effect for plan years beginning after December 31, 2020.
Changes To RMD Age And Contribution Age
Prior to the SECURE Act, retirement plan (e.g. 401 (k) or IRA) participants had to take required minimum distributions at the age of 70½ but now you don’t need to make withdrawals until the age of 72. What’s more, we are now allowed to keep making contributions to our IRAs indefinitely as long as we are still working and receiving a salary. You and your spouse are able to contribute $7,000 each annually (or a total of $14,000) which can be a significant tax deduction and retirement savings.
Non-Spouse Inherited IRAs
In the past, withdrawals from non-spouse inherited IRAs could have been stretched over the life expectancy of the beneficiary. Under the SECURE Act though, if a retirement account owner passes away after January 1, 2020, the beneficiaries could be required to withdraw the assets from an inherited IRA or 401(k) within a 10-year period.
There are, however, some exceptions. If the beneficiaries are under the age of 18, disabled, chronically ill or up to 10 years younger than the IRA owner, the 10-year rule does not apply. Consequently, if your beneficiaries are adult children it may be more financially advantageous to name your spouse as the sole beneficiary as he or she will not be subject to the 10-year distribution rules.
Penalty-Free Withdrawals For New Parents
In addition, penalty-free early withdrawals from some types of retirement accounts for specific circumstances, such as costly medical emergencies or for buying health insurance after losing your job, now, SECURE Act also allows a maximum withdrawal of $5,000 from an IRA or 401(k) after the birth or adoption of a child. Please note that although you don’t have to pay a penalty for the withdrawal, if you don’t repay the amount as a rollover contribution, you have to pay income tax on the amount that was withdrawn.
More Opportunities To Have Annuity Options As Part Of Our 401(K) Plans
Another of the important changes resulting from the SECURE Act is that it is now easier for employers to offer 401(k) plans with annuity or lifetime income options since many of the legal risks to employers have been removed.
Pension plans providing annuity options can be more attractive for some investors since they can provide them a steady stream of income for a specific number of years, or for the remainder of their life. In addition, by choosing a retirement plan with an annuity option, they can protect themselves against outliving their income. Basically, a pension plan with an annuity option acts like the U.S. Social Security system which is a type of annuity program since we pay into it to receive our monthly benefits.
Essentially, by providing us with a steady income for our entire lifetime, annuities can help protect us against issues regarding how quickly we can spend our retirement savings. However, the annuity should be designed to take into consideration facts like our tendency to spend more during the early years of our retirement and less in the later years. Although annuities may seem attractive, they can also be complicated so it is best to seek the advice of professional financial advisors, like the team at Multop Financial, who can help you decide what is the most suitable option for your specific needs.
For more information about the SECURE Act and how it can affect your retirement plans, please use our online contact form or call us at (888) 671-7891 today. Our team of advisors will work with you to develop a customized financial plan specific to your personal goals and current needs!
Securities and financial planning offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Multop Financial is not affiliated with LPL Financial, and offers tax and accounting services separate and apart from LPL Financial.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Contact your plan sponsor if you would like more details regarding applicable provisions of your specific retirement plan.