The SECURE Act: A Summary of Big Changes That Could Impact You

Saving for retirement just got easier. That’s because Congress updated a bunch of seemingly small — but important — rules to remove barriers to building a financial foundation that will support all the fun things you’ll do during a retirement that could last for decades.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which was signed into law Dec. 20, represents the largest overhaul of retirement rules in more than a decade. Broadly speaking, the package of reforms updates a host of rules to better reflect the new demographics of retirement, broadens employee access to retirement plans and makes it simpler for businesses to offer plans to employees. Here’s what you should know about the SECURE Act and the ways it may affect you.

MAX AGE FOR IRA CONTRIBUTIONS REPEALED, RMD AGE RAISED

People are living and working longer, and the SECURE Act reflects these new demographics. For one, it repeals the prohibition on making a deductible contribution to a traditional IRA after age 70½ starting in the 2020 tax year. If you can continue working past your “retirement age”, why shouldn’t you be able to contribute to your retirement?

In the same vein, the bill also boosts the age that you must start taking RMDs from 70½ to 72 — again to better reflect current life expectancies (this applies to people who turn 70½ after Dec. 31, 2019). RMDs, or required minimum distributions, dictate the minimum amount of money you must withdraw from a retirement account in a given year. The original required beginning date was established back in 1960 and hadn’t been adjusted since that time.

PART-TIME EMPLOYEES ARE PART OF THE PLAN

Under the SECURE Act, employers are now able to offer retirement plans for part-time employees who meet certain work requirements. Workers who have at least 500 hours of service for three consecutive years would be eligible to participate in the company retirement plan. However, the law doesn’t require employers to make matching or profit-sharing contributions to part-time employees.

PENALTY-FREE WITHDRAWALS TO START A FAMILY

The SECURE Act contains a provision that allows for penalty-free withdrawals from retirement accounts for growing families. Each parent can withdraw up to $5,000 each from their retirement accounts (if they have separate accounts) within a year of their child’s birth or adoption without the typical 10 percent penalty. In general, you want to keep retirement savings untapped so you can maximize the potential for long-term growth. However, there might be situations where this makes sense, but it’d be a good idea to speak with a financial advisor beforehand to see if it’s a strategic fit with your overall plan.

ANNUITIES AVAILABLE AS PART OF THE PLAN

It will now be easier for employers to offer more annuities as part of a comprehensive qualified retirement plan. Many employers have hesitated to add annuities to their 401(k)s since the employer could be held liable if the annuity provider failed to make payments as promised. The new law would grant employers a “fiduciary safe harbor” when choosing an annuity provider, which makes it easier to offer these savings vehicles.

Annuities bring an element of certainty into a long-term plan as they allow you to put money away for retirement and, in turn, receive a guaranteed, regular “paycheck” that you can’t outlive once you retire. Annuities, therefore, help guarantee you won’t outlive your retirement income. However, it’s important to weight the pros and cons of annuities to see if they’re a good fit for your plan.

SAY GOODBYE TO STRETCH IRAS

The so-called “stretch” IRA was an estate planning strategy used to allow an inherited IRA to continue growing and compounding on a tax-deferred basis, especially if it was passed down to the youngest beneficiary in the family. Under the old rules, heirs were required to take minimum distributions from the IRA, but the minimum amount was determined by the beneficiary’s life expectancy. The younger a person was, the lower their minimum distribution. That means the remaining balance could continue growing for decades, effectively stretching those savings out longer.

The SECURE Act requires inherited IRAs to be drawn down within 10 years if the IRA or qualified plan owner dies after 2019. However, existing inherited IRAs are not affected until the current beneficiary passes away. This is a big change that could impact a long-term financial plan, so this is a good year to reach out to a financial advisor if the stretch IRA featured in your plan projections.