It’s been a long time coming but Congress just passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. President Trump signed the bill on Friday, December 20, 2019 as part of the government’s spending bill and it took effect January 1, 2020.
So how will the SECURE Act effect your retirement savings? Below are a few of the major provisions and how they might affect you.
No Age Restrictions on IRA Contributions
Currently, contributions to a traditional IRA are not allowed if you are a working taxpayer over the age of 70.5. The SECURE Act now allows working taxpayers over 70.5 to continue contributing to a traditional IRA. There are no age-based restrictions on contributions to a Roth IRA.
RMDs Starting at Age 72
Currently, RMDs generally must begin in the year you turn 70.5. If you work past age 70.5, RMDs from your 401(k) aren’t required until after termination of employment, unless you own at least 5% of the company. The SECURE Act changes the age requirement from 70.5 to 72, which means you have more time to keep your funds tax deferred and invested.
“Stretch” IRAs Eliminated
Unfortunately, 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. 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.
401(k) for Part-Time Employees
Currently, if you are an employee who has not worked at least 1,000 hours during the plan year you are typically not permitted to participate in your employer’s 401(k) plan. Starting in 2020, the SECURE Act reduces the hours required for plan participation from 1,000 to 500 hours per year, for at least three consecutive years. It also requires the participant to be 21 years of age by the end of the three-year period.
Auto-Enrollment 401(k) Plans Enhanced
If you are part of an employer sponsored retirement plan your plan could have an auto-enrollment and auto escalation feature. The SECURE Act will allow your employer to automatically enroll you into a retirement plan at a 6% rate of salary contribution instead of 3%. The provision also includes a safe harbor for employers to increase employee contributions to the retirement plan up to a maximum of 15% of an employee’s annual pay.
Annuity Options in 401(k) plans
Currently, 401(k) plan statements only provide you with an account balance. The SECURE Act requires 401(k) plan administrators to provide you with an annual “lifetime income disclosure statement.” This statement will show you how much money you could get each month if your total 401(k) account balance were used to purchase an annuity. These annuities will be portable and avoid surrender charges and fees.
Penalty-Free Withdrawals for Birth or Adoption of Child
The SECURE Act now allows you to take distributions from your 401(k), IRA or other retirement accounts (up to $5,000) following the birth or adoption of a child without paying the usual 10% early-distribution penalty. Married couples can each take a distribution from his or her own retirement accounts for a total of $10,000 per couple. You have one year from the date your child is born or the adoption is finalized to withdraw the funds from your retirement accounts without paying the 10% penalty.
Louis J. Chabrier