Recently, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the most extensive retirement bill to take effect in more than a decade. The legislation, which helps make saving for retirement easier for Americans, was stalled in Congress until it was tacked onto a spending bill.
This important piece of law will hopefully encourage more Americans to save for retirement, especially considering that a recent report from the Federal Reserve showed that about a quarter of Americans do not have retirement savings.
While the bill does not provide new incentives for saving, nor does it make money more accessible, it could still encourage people to put more in their retirement accounts via a few key changes. Some of the most important changes include the following:
1. More retirement accounts at small companies
Many small- and medium-sized companies do not have the resources to offer their employees a 401(k). In fact, only about half of these companies in the US provide retirement accounts.
The SECURE Act makes it easier for these companies to band together to provide retirement plans for their employees. While such grouping is currently allowed by law, the companies involved must all be in the same industry. The SECURE Act removes this requirement so that all small businesses—regardless of industry—can band together and take advantage of economies of scale. Furthermore, the act does away with the condition punishing all members of a group if one company fails to follow the rules. Under the new law, only the company that breaks the rules will be punished.
Also, the new law requires that employers who do offer a 401(k) let part-time workers access it provided they work more than 1,000 hours in a year or more than 500 hours annually for three consecutive years.
2. No time limit on contributions to a traditional IRA
Currently, there is an age cap on contributing to a traditional IRA, although no such cap exists for a Roth IRA. Under the new law, individuals will be able to contribute to a traditional IRA in the year in which they turn 70.5—and even beyond provided that they continue to have an income. This change is important considering that many people are choosing to work past the traditional retirement age of 65 to boost their accounts and provide more security for the future. Lawmakers expect that many baby boomers will take advantage of this law and continue working while contributing to a traditional IRA and enjoying the tax deductions this sort of account provides.
3. New annuity options in 401(k) accounts
One of the issues that retirees face is how to translate savings in a 401(k) to a sustainable income during retirement. Annuities are an insurance product that transforms a lump sum into a lifetime-guaranteed income for retirees. Companies have largely been hesitant to offer this product in a 401(k) plan because of liability issues should something happen with the insurer.
The new bill provides greater legal coverage for employers, which will likely encourage them to offer this option in their plans. What’s more, research has shown that guaranteed income increases well-being among older adults. This especially applies to deferred annuities, which are fairly inexpensive and are a great way to secure income later in life.
Some people worry that this change will push employees to purchase complicated annuities they don’t truly understand. Ultimately, employers will need to vet the annuities they offer their workers.
4. Earlier taxes on inherited IRA accounts
Estate planners sometimes make use of something called the stretch IRA, which allows IRA beneficiaries to prolong distributions from inherited accounts, as well as the required tax payments based on the accounts, according to life expectancy. For example, if your grandchild is named a beneficiary, he or she can keep the money invested for decades with continued tax benefits. The SECURE Act does away with this. Instead, the majority of beneficiaries will now have to withdraw all distributions from the account and pay taxes on it within 10 years. The only people who are exempted from this rule are spouses and individuals with chronic illnesses or disabilities.
Importantly, the new provision will not act retroactively, so people who have already inherited an IRA will not need to change their use of it. However, the new rules apply to any account inherited on January 1, 2020, and onward.
5. Later start on required minimum distributions
Under current law, individuals must start making withdrawals from their traditional retirement accounts at the age of 70.5. Starting in 2020, individuals can wait until they turn 72 before they must take their minimum distributions. These required minimum distributions are put into place to ensure the government gets a percentage of your money that has been growing tax free for so long.
While many people are already pulling on their accounts by their 70s, individuals who continue to work or who can rely on other sources of income will have more time before they need to start making withdrawals. Unfortunately, people who have already turned 70.5 and begun making their required minimum distributions will need to continue doing so. Only people who would have reached that age after the start of 2020 will be able to take advantage of the new law.