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While retirement planning is essential to long-term financial security, it can be a struggle to actually create a plan that works. The 2019 SECURE — short for Setting Every Community Up for Retirement Enhancement — Act makes it easier for many people to save for retirement.
What do you need to know?
Here’s a rundown of some of the provisions likely to affect your savings plan:
IRA contributions and distributions. If you hadn’t reached age 70½ by the end of 2019, the SECURE Act allows you to push back the age at which you must begin taking required minimum distributions (RMDs) from your retirement plan. Instead of 70½, it’s now age 72. (Be aware that, under the Coronavirus Aid, Relief, and Economic Security Act, RMDs aren’t required in 2020.)
Another change affects retirement plan contributions. Before the SECURE Act, you had to stop contributing to a traditional IRA at age 70½. The act repeals the maximum age, so long as you’re earning compensation. This is effective for contributions made for the 2020 tax year.
The act also prohibits qualified employer retirement plans from making loans through credit cards or similar instruments.
Stretch IRAs. The SECURE Act eliminates what was known as the “stretch IRA.” This allowed nonspouses who inherited a retirement account to take distributions over their lifetimes. The act changes this, generally requiring non-spouse heirs to deplete the account within 10 years of the account owner’s death. Note that this applies only to a person who inherits an IRA from someone who dies this year or after — if you’ve inherited an IRA from someone who died before 2020, there’s no change.
New parents. Within a year after a child is born or adopted, parents can withdraw from a defined contribution retirement account up to $5,000, penalty-free, to cover related expenses. Note that the $5,000 limit is per person, meaning that a qualifying couple may, in aggregate, withdraw up to $10,000 without being subject to the penalty.
Part-time workers. Do you work part-time? Starting in 2021, many employers will have to allow part-time employees to enroll in their 401(k) plans, as long as the employees work at least 500 hours in each of three consecutive years. (This rule doesn’t apply to collectively bargained plans.)
Small employers. If you work at a smaller company (generally, one with up to 100 employees), you may find it easier than it used to be to persuade your employer to provide a retirement savings plan, if it hasn’t already. For one thing, the SECURE Act provides a credit for expenses incurred to establish or administer many employer retirement savings plans, including 401(k)s, SIMPLE IRAs and SEP IRAs. The credit is the greater of 1) $500 or 2) the lesser of $250 multiplied by the number of employees for plan participation, or $5,000. It applies for up to three years.
Also, employers whose new plans include automatic enrollment may be eligible for a $500 credit, in addition to the credit for startup costs. This credit is available for three years. Employers who convert their existing plans to include automatic enrollment may be eligible for the credit as well.
In addition, the act makes it easier for smaller employers to join with other employers to participate in multiple employer plans (MEPs) or, as they’re now called, pooled employer plans (PEPs). By combining their employee bases, smaller businesses can save on administrative costs. The act also largely did away with the “one bad apple rule,” which held that if one employer in the MEP failed to satisfy a plan requirement, the plan would be invalidated for all employers. This provision goes into effect for plan years after 2020.
Graduate students and home health care workers. Several provisions within the SECURE Act focus on specific groups. For instance, stipends and nontuition fellowship payments received by graduate and postdoctoral students previously weren’t considered compensation for the purpose of making IRA contributions. The act permits these amounts to be included in income for contributing to an IRA.
Similarly, home health care workers often found it difficult to save for retirement because typically they’re compensated through “difficulty of care” payments that are exempt from taxation. In the past, these payments couldn’t be used to contribute to defined contribution plans or IRAs. Now, these payments can be treated as compensation for the purpose of contributing to many retirement plans.
What steps can you take?
The provisions in the SECURE Act may affect your retirement planning in some beneficial ways, opening up new strategies for you to use to ensure a better financial future. Your Belfint advisor can help you assess the changes and decide on any next steps.