In December 2019, Congress passed the SECURE Act and President Trump is expected to sign the bill into law in the coming days. Here is an overview of the new law and how this law will affect your retirement policies beginning on January 1, 2020:
What is the SECURE Act?
The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. The bill was pushed forward by Congress in response to the low levels of retirement funds those between the ages of 35 and 64 now possess. Americans are not saving as much money as they used to. According to a Wall Street Journal article, people in this age range “face a retirement savings shortfall of $3.83 trillion, with 41% of households projected to run short of money in later life.”
To encourage savings and investment for these generations, Congress has made several important changes to the law governing retirement accounts.
The Age for Required Minimal Distributions (RMDs) Is Now 72.
Under the old law, retirees must begin taking requirement minimal distributions at age 70 ½. The new law pushes that age back to 72. What that means is that if you have a qualified retirement account such as an IRA or 401(k) you can grow those funds another year and a half before the government requires you to take distributions.
If you are over 70 ½ already you will still be required to take your minimum distribution. For those under 70 ½ after January 1, 2020, you will not be required to take a minimum distribution until you turn 72.
You Can Still Contribute to Your Traditional IRA After You Turn 70 ½
The new law allows those who wish to continue to work into their seventies to continue to save for retirement. Under the old law, you could not contribute to a traditional IRA after you turned 70 1/2. This new law will allow people to work longer and continue to save for retirement.
The Rules for Inherited IRAs Have Changed
In the past, if a parent passed away with an IRA, a child would be able to receive this IRA as an inherited IRA. This type of IRA would then be distributed out to the child over the life expectancy of the child. Now, under the new law, that has all changed. Specifically, if a parent passes away and leaves an IRA to a child, the child can still receive the IRA as an inherited IRA but it must be completely distributed to the child within a period of 10 years. There are exceptions for spouses and those who are disabled.
It Is Now Easier for Part Time Employees to Obtain 401(k)s under the SECURE Act
Under the old law, it was difficult for part time employees to be eligible for their employer's 401(k) plan. That employee had to work over 1,000 hours during a given year. And that was only if their employer even offered a 401(k) plan.
The new law makes it much easier for small business to work together to be able to offer 401(k) plans to their part time employees. The law does this by eliminating barriers that previously existed such that the employee had to work in similar industries to be eligible for 401(k) plans.
Additionally, the SECURE Act provides tax credits for small businesses to set up 401(k) plans to help incentivize investment and savings. Small businesses can receive up to $5,000 credit for the costs of creating a plan and another $500 credit if the retirement plans are auto enrolled.
If You Have A New Baby or Adopt You Can Withdraw with No Penalty
Those new parents who either have a new biological child or adopt one can now dip into their 401(k), IRA, or other tax deferred retirement account without having to pay a customary 10% withdrawal fee. However, you must make the withdrawal within one year from the date of birth of the child, or the adoption date. You are also limited to a $5,000 limit on the withdrawal and you have to pay taxes on it. If you later decide to reimburse your retirement account by putting the $5,000.00 back into the account you can do so without incurring any taxes on that amount.
Do note that if you adopt your spouse's child, then you would be ineligible to receive the penalty free withdrawal.
The Key Takeaway
The purpose of the SECURE Act is to incentivize individuals to save more. In so doing, it makes substantial changes to certain retirement provisions. Individuals can now work longer and contribute to their retirement plan as well as delay the age in which required minimal distributions must be taken. Additionally, the new law provides small businesses certain credits and motivations to help their employees save. If you are a small business owner or are approaching retirement you should certainly be aware of the new law changes. Reach out to us at our Clarksville, Tennessee office if you have any questions.