At the end of 2019, the federal government signed the Setting Every Community Up for Retirement Enhancement, or SECURE, Act into law. At the beginning of this year, the SECURE Act officially went into effect, and it changes many things about the way Americans plan and prepare for retirement. If you’re not yet familiar with the SECURE Act, it’s important to understand how the changes it implements will impact your retirement plans—particularly if you’re close to retirement age. If you have any questions regarding your retirement planning, please feel free to reach out to us. In the meantime, this article should give you an overview of the biggest changes the SECURE Act has introduced.
RMDs Are Delayed
RMDs, or required minimum distributions, refer to a minimum annual distribution that individuals are legally required to take from their retirement accounts. Previously, individuals were required to begin taking RMDs at the age of 70 ½. However, the SECURE Act pushes back these minimum distributions to the age of 72. You can still begin taking annual distributions earlier, if you wish, but you will no longer be required to take RMDs until you turn 72.
This change applies to anyone who will turn 70 ½ this year or later; this means those who were born on or after July 1, 1949. If you were born prior to that date, the previous age requirement for RMDs still applies to you. The delayed RMDs are applied to traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred employer retirement accounts.
No More Age Cap on Contributions
Under previous laws, you could only contribute to an IRA until the age of 70 ½ (the same age at which you were required to begin taking distributions). The SECURE Act eliminates the age cap on contributions altogether, so Americans can continue making contributions for as long as they are earning income.
This change, as well as the delayed RMDs, will help to address the changing face of the workforce. With workers retiring later in life, and some continuing with part-time work even after officially retiring from their careers, the elimination of the age cap and delay of RMDs will help Americans continue to save for their later retirements for as long as they choose to be employed.
No More “Stretching” Inherited Accounts
Retirement accounts can often be left to a beneficiary when the account holder passes away. In the past, certain laws surrounding how inherited IRAs were handled allowed beneficiaries to extend the minimum distributions throughout their own lifetime. Frequently, this allowed the inherited funds to continue growing—free of taxes—for several decades. The provisions that allowed this “stretching” to occur have now been eliminated for IRAs, 401(k)s, and other contribution plans.
The new laws vary depending on exactly who the beneficiary of the account is. For non-spouse beneficiaries, distributions must be made within 10 years of inheriting the account. There are exceptions to this for spouses, beneficiaries with a disability, and certain other individuals. Minor children who have inherited a retirement account are exempt from the 10-year distribution rule until they turn 18.
If you have already inherited an IRA or other retirement account, don’t worry; these changes only apply to accounts inherited in 2020 or later.
Retirement Eligibility for Part-Time Workers
The SECURE Act also aims to make retirement accounts more accessible to a greater number of Americans. One way in which it does this is by introducing a new law that allows long-term, part-time employees to qualify for an employer-sponsored retirement plan. Previously, employers didn’t have to offer retirement plans to part-time employees. Now, however, any employer who offers a 401(k) plan is required to offer this benefit, not only to employees that work more than 1,000 hours a year, but also to anyone who works more than 500 hours over 3 consecutive years.
Credits for Small Employer Retirement Plans
In addition to making retirement plans available to part-time workers, the SECURE Act also makes it more feasible for small businesses to offer retirement plans to their employees. In the past, many small businesses struggled to offer this benefit due to the overhead costs involved with setting up an employer retirement plan. Through the SECURE Act, small employers (those with fewer than 100 employees) can receive a tax credit for providing this benefit to their workers.
The new law provides $250 to businesses for every non-highly compensated employee who is eligible for the retirement plan. The minimum credit to qualify is $500, or two employees, and the maximum credit is $5,000. This credit can be applied to 401(k), SEP, SIMPLE, and profit-sharing plans.
If you have questions about how your retirement plans or your business may be impacted by the SECURE Act, reach out to us today. We’ll be happy to help you navigate these new laws to better understand how they changes affect you.