If you keep a close eye on your retirement accounts, then you’re likely already familiar with the SECURE Act of 2019, and how you will be impacted. However, even if you don’t have an IRA or 401(k), there are still plenty of reasons for you to pay attention to this new law that went into effect on January 1, 2020. The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, was designed to help more Americans attain financial preparedness for their retirement years. Recent data from the U.S. Bureau of Labor Statistics revealed that only 55 percent of American adults contribute to a workplace retirement plan such as a 401(k), and the SECURE Act aims to correct that.
The SECURE Act, a bipartisan bill signed into law by President Donald Trump on December 20, 2019, was designed to assist Americans in saving for retirement through various policy changes.
SECURE Act and Tax-Advantaged Accounts
The SECURE Act ushered in several key policy changes to individual retirement accounts, defined contribution plans like 401(k)s, defined benefit pension plans and 529 college savings plans. One such change is the repeal of an age limit for IRA contributions. Workers can now continue to make contributions to their traditional IRA beyond the previous 70 ½ years with no age limit – provided they keep working. You also no longer need to take required minimum distributions (RMDs) on your IRAs or 401(k) until the age of 72; before the SECURE Act, you had to begin taking RMDs at 70 ½ years old.
Another change that affects your tax-advantaged accounts is how your beneficiaries will have to take distributions on inherited IRAs or 401(k)s. After the SECURE Act went into effect, most non-spouse beneficiaries must take distributions to completely clear the account by the 10th year after the original account holder dies. Exceptions do apply, so be sure to check with your financial advisor or 401(k) manager for more information on this exception.
However, if you’re a new parent, you’ll welcome the penalty-free withdrawals you can make from a qualified individual retirement account or 401(k) after the birth or adoption of a child. Before the SECURE Act, withdrawals prior to the age of 59 ½ would be subject to a 10 percent penalty. Now, new parents are allowed to withdraw up to $5,000 per parent from an IRA or 401(k) before this age without penalty. But, if you don't repay the funds as agreed, you will owe income tax on the money. Parents can also use up to $10,000 per year to repay student loans using a 529 Plan, and may be able to use the plan to pay for qualifying apprenticeship programs.
Key Tax-Advantaged Account Takeaways
- Required Minimum Distribution age increases from 70 ½ to 72 years.
- Penalty-Free Withdrawals up to $5,000 per parent for new parents.
- 529 Plans can now be used to make repayments up to $10,000 annually on qualified student loans.
- Non-Spouse Beneficiaries must now take all distributions on inherited retirement accounts or 401(k) plans within 10 years; exceptions apply.
- Age Limit for IRA contributions has been removed.
Employers and the SECURE Act
The SECURE Act not only affects individuals saving for retirement but also has some implications for business owners. Many small business owners may find it difficult to offer their employees 401(k) or other employer-sponsored retirement options. The SECURE Act was designed to change this and make it easier for employers to offer a retirement solution for their employees with the help of tax credits.
If you're an employer, and you currently don't have a retirement plan set up for your employees, then you may be eligible to receive a tax credit for implementing a retirement plan. You could receive a credit of $250 per qualifying employee up to a maximum credit of $5,000 for a three-year period starting after December 31, 2019. You must employ no more than 100 people and set up one of the various types of retirement plans including 401(k)s, SEP and SIMPLE IRA plans. If you set up an automatic enrollment program for your employees, you could receive an additional credit of up to $500.
Key Employer Takeaways
- Small Business Owners will have an easier time setting up "safe harbor" plans for employees.
- Employer Tax Credit of up to $5,000 for a three year period for employers who create a 401(k) or SIMPLE IRA. An additional credit of up to $500 is available to companies that also set up automatic enrollment.
How the SECURE Act Affects Workers
Previously, part-time employees who worked less than 1,000 hours in a year were not automatically eligible to participate in a company’s 401(k) plan. However, due to the signing of the SECURE Act into law, the threshold has been lowered to include part-time employees who work at least 500 hours in a 12-month period for three consecutive years. Workers must be at least 21 years of age or older to contribute and this law also includes employees who work at least 1,000 hours in a year.
In addition, workers will find themselves with more options when it comes to how they can invest their retirement plan dollars as the new law allows plan providers to offer more lifetime income solutions such as annuities in their 401(k)s. Before the SECURE Act, employers were responsible for the investment vehicles chosen for the company’s 401(k) plan. But, with the passing of the SECURE Act, insurance companies bear responsibility to ensure the investments are appropriate for the employees’ portfolios.
Although this means you may see different investment options in your plan soon, it’s always a good idea to consult with a financial advisor or estate planner before deciding to invest in annuities or changing your retirement strategy.
Key Employee Takeaways
- Part-Time Employees are now eligible to contribute to 401(k) plans.
- 401(k) Plans can now include annuities.
- U.S. News: How the SECURE Act Affects Your Retirement Planning
- Marketwatch: The SECURE Act Is Changing Retirement — Here Are the Most Important Things To Know
- Fidelity Investments: The SECURE Act and You
- How the SECURE Act Affects Your Retirement Planning | IRAs | US News
- Pocketsense: Difference Between Pension and Retirement Plan
- Pocketsense: 7 Most Common 401k Blunders
- Pocketsense: IRS Rules for 529 Plans
- Understanding how the SECURE Act will impact your retirement | Fidelity
- Congress.gov. "H.R.1865—Further Consolidated Appropriations Act, 2020." Accessed Feb. 14, 2020.
- Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).” Accessed Feb. 14, 2020.
- House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019 (THE SECURE ACT)." Section 113. Page 3. Accessed Feb. 14, 2020.
- Congress.gov. "H.R.1994—Setting Every Community Up for Retirement Enhancement Act of 2019." Section 113. Accessed Feb. 14, 2020.
- House Committee on Ways and Means. “The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)." Page 3. Section 111. Accessed Feb. 14, 2020.
- House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019." Page 2. Sec. 106. Accessed Feb. 14, 2020.
- U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Feb. 14, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.