How The SECURE Act Will Affect Your Retirement

This article will discuss how the Secure Act may affect your retirement in the years to come. We will answer the following questions:

• What is the SECURE Act?
• How will the SECURE Act affect my retirement accounts?
• Does the SECURE Act give greater access to retirement accounts?
• How will the SECURE Act affect inherited retirement accounts?

What Is The SECURE Act?

The Setting Every Community Up For Retirement Enhancement Act of 2019 was approved on December 19th, 2019, as part of a larger tax measure. The SECURE Act makes it easier to save for retirement, increases the accessibility of retirement plans for specific individuals, and gives incentives to small businesses that want to offer retirement accounts to their employees.

Many of the SECURE Act’s provisions went into effect on January 1st, 2020, but the remainder will be fully realized over the next one to two years. The Biden administration is unlikely to change any of the provisions in the new law, as many were seen as logical improvements to an antiquated system. According to stats from the U.S. Bureau of Labor and Statistics published as recently as 2018, only 55% of Americans participate in employer-sponsored retirement plans, causing many to tap into Social Security benefits early. 

How Will The SECURE Act Affect My Retirement Accounts?

The SECURE Act had many immediate age-related effects on IRAs and 401(k)s; including:

• Americans are no longer required to withdraw assets from their IRAs and 401(k)s at age 70½.
• Required minimum distributions (RMDs) now begin at age 72 for those who turned 70½ during the 2020 calendar year.
• Those who were already taking the previously required RMDs, or may have unknowingly begun taking their RMDs in 2020, should continue to do so unless advised otherwise.
• Contributions to IRA plans can continue past age 70½ as long as the individual is still working.
• “Lifetime Income Disclosure Statements” will increase transparency into retirement income and give consumers a better idea of where their potential income will be throughout their retirement.

How Does The Secure Act Give Greater Access To Retirement Accounts?

Before the SECURE Act became law, part-time employees that worked less than 1000 in a given year could be excluded from 401(k) plans. With the new law, employees working between 500 and 1000 hours per year (roughly 10 to 20 hours per week) for three consecutive years are eligible for their company’s 401(k) plan; these employees have been termed “long-term part-time.” However, the change does not extend to employer match 401(k) plans, only the salary deferral portion. The LTPT provision of the SECURE Act begins January 1st, 2021, but employees must work the full three years from that point forward to be eligible. Other noteworthy rules under the long-term part-time employee provision include:

• An employee must reach age 21 by the end of the third year to be eligible;
• LTPT employees can be excluded from 401(k) safe harbor contributions and qualified automatic contribution arrangements;
• LTPT employees that subsequently work 1000 hours within 12 months should automatically become full-time participants in their 401(k) plan; and
• Further vesting and benefit rules based on hours worked over a specified period

The SECURE Act allows qualifying individuals to pull funds from their retirement accounts and college savings plans in specific situations. New parents can take a “qualified birth or adoption distribution” of up to $5,000 from particular retirement accounts. The new parents can avoid the 10% early withdrawal penalty if they can repay the money borrowed under a rollover contribution.

Families with leftover funds in their 529 savings accounts can now use up to $10,000 to pay down student loan debt. The remaining funds can also be used to pay for eligible apprenticeship programs.

How Will The SECURE Act Affect Inherited Retirement Accounts?

Before the SECURE Act, it was common for those inheriting IRAs and 401(k)s to “stretch” the distributions and tax payments over their lifetime, allowing them to have a guaranteed monthly income and predictable tax payment. However, beneficiaries receiving inherited IRAs and 401(k)s from the original owners must withdraw all funds from those accounts within 10 years. Exceptions to the 10- year rule include funds left to a minor child, surviving spouse, a disabled or chronically ill individual, beneficiaries less than 10 years younger than the original account holder, and those who inherited a 401(k) or IRA before January 1st, 2020. 

If any of the above criteria apply to you, we highly suggest speaking with your estate planning attorney to ensure that you’re able to take advantage of the new benefits available under the SECURE Act. Also, look for our other article on the SECURE Act, “How The Secure Act Will Affect Your Small Business.”