Over the Holidays, congress came together to pass the bipartisan SECURE Act. It is the most sweeping retirement reform bill since the mid 2000’s and its intended purpose is to strengthen retirement security for Americans all over the country. The new law stands for Setting Every Community Up for Retirement Enhancement and went into place on January 1st 2020.
Here are the 6 big takeaways and how they may affect you or your loved ones.
1. Current Workers: You will now be able to add into your Traditional IRA past 70.5 if you are still working.
2. Retirees: the previous age at which you had to distribute money (Required Minimum Distributions or RMDs’) from Pre-Tax retirement accounts such as a 401Ks or Tradtional IRAs was 70.5. The new law changes that age to 72 as Americans are living and working longer which may help some Americans keep their nest egg longer. This could be very important with the ever increasing costs of healthcare in retirement. But note, if you did turn 70.5 in 2019 you are still considered grandfathered into the previous law so you must take your 2020 RMD or face a 50% penalty on your RMD amount. For instance, if your RMD was $20,000 and you don’t distribute it from your IRA, you will have a $10,000 penalty imposed on you by the IRS.
3. Beneficiary IRA Inheritors: If you already have inherited an IRA, you are grandfathered into the old law and can continue to take your distributions over your lifetime if you so please. The new law now stipulates that once you inherit an IRA, you must distribute the entire account balance within 10 years. For example, you can take your entire balance out on day 1, or year 9 day 364-either way you would be following the law. Also, you can do a mixture of as much or as little in terms of year by year so long as all the inherited money is out of the account by the end of year 10 you will be good to go. The biggest implication of this is the tax burden Inheritors will face. People that typically inherit IRA’s are close to their peak earning years so combine that income with the extra income your Beneficiary IRA distribution creates and you could be looking at a sizable tax bill if the proper planning doesn’t take place.
4. Small Business Owners and workers: part of the intention of the new law is to help small business owners and workers more effectively save for retirement. Previously, the cost of setting up a retirement plan could be prohibitively expensive but the new Act provides a tax credit up to $5,000 to offset the cost of setting up a plan plus an additional $500 credit if the plan features automatic enrollment. The automatic enrollment credit is important as studies have shown that by offering automatic enrollment in retirement plans, people save more money for retirement. Another provision of the act will allow part time workers who work 1000 hours in a given year or 500 hours over three consecutive years to participate in a retirement plan. Too many workers don’t have access to a retirement plan so this provision aims to combat that problem.
5. Student Debt Holders: The new law provides the ability to use up to $10,000 from your 529 College savings account to pay down student loans.
With all the new changes, it is important to understand how it may affect you or your loved ones as this law could affect everyone from recent college graduates all the way to retirees! If you have any questions, make sure you consult your financial advisor.