If you have questions on how the SECURE (Setting Every Community Up for Retirement Enhancement) Act might affect your retirement account, you’re not alone. In a nutshell, the Act’s main goals are to make it easier for people to save for retirement and to encourage employers who haven’t already to set up plans. Four changes that are most likely to affect you or your family members:
- Changes to restrictions on contributions and withdrawals
- Inclusion of part-time workers in 401(k) plans
- Changes to the amount of time people who inherit IRAs have to withdraw funds
- An increase in tax credit plus access to multiemployer plans (MEPS) for small businesses/small employers
Changes to Contribution and Withdrawal Restrictions
Contributing to traditional IRAs. Have a traditional IRA? It used to be that if you wanted to make contributions to your account, you needed earned income (a paycheck) and had to be younger than 70½. SECURE has eliminated the age requirement. So, as long as you have earned income,1 you can continue to sock away money well into your 70s (and beyond).
Making withdrawals. You used to have to start taking Required Minimum Distributions (RMDs) at age 70½. Now, you can wait until you’re 72 before you start withdrawing. However, if you turned 70½ at any time during 2019, you’ll have to continue taking RMDs.
Child’s birth or adoption. Also under the Act, a parent can withdraw up to $5,000 within a year of the birth or adoption of a child without paying the 10 percent early-withdrawal penalty. For a married couple, that means each spouse can withdraw up to $5,000 penalty-free. But, you’ll still owe income tax, unless you repay what you withdrew.
529 plans. You can now use your child’s 529 funds to pay for certain apprentice programs. And, there’s more good news. If you have money remaining in the plan after they graduate, you can use up to $10,000 to repay student debt.
Changes to Who Qualifies for a 401(k)
It’s now a requirement that part-time workers be included in employers’ 401(k) plans. In the past, employers could exclude those who worked fewer than 1,000 hours from their plans. The Act requires employers that provide 401(k) plans to include eligible employees age 21 or older who either worked one year for at least 1,000 hours or at least 500 hours a year for three years in a row.
Changes to How Your Heirs Can Access Funds
One of the biggest changes affects how your heirs can withdraw funds. In the past, non-spouse beneficiaries of an IRA or defined contribution plan such as a 401(k) could stretch out the withdrawals over their lifetimes, so they could pay lower taxes and have more time for the funds to grow. The SECURE Act eliminates that option. Instead, non-spouse beneficiaries must withdraw all money from the account within 10 years of the account owner’s death. There are exceptions if the beneficiary is a minor child of the IRA owner,2 chronically ill, disabled or not more than 10 years younger than the IRA owner. Plus, if the beneficiary is your spouse, (s)he won’t have to start withdrawing before you would have become 72. And, if you have a Roth IRA, your heirs aren’t likely to be affected because Roth withdrawals are usually tax-free.
Changes for Small Employers
Many Americans either don’t have retirement accounts or their accounts are insufficient to cover their retirement needs. Of those who do have accounts, workplace plans are the primary source. Since a large percentage of workers are employed by small businesses, making it easier for these businesses to establish retirement plans will help increase workers’ retirement preparedness. Highlights of changes aimed at encouraging more small employers to establish plans include:
- A substantial increase in the tax credit for small businesses that establish a plan—up to $5,000 a year for three years (up from $500)
- An additional $500 a year for three years if the owners encourage automatic enrollment
- Allowing employers to join Open Multiple Employer Plans (MEPs), also known a pooled employer plans (PEPs), which are simpler and more cost-effective than if the employers established their own plans
According to a Nationwide® survey, because of the new provisions, 80 percent of small employers now believe they’ll be able to offer a retirement plan that rivals what large corporations provide.
Navy Federal Credit Union offers a variety of retirement savings options, including Traditional and Roth IRAs and Simplified Employee Pension (SEP) plans. Want to know more about planning for your retirement? Visit MakingCents for tips on how you can plan for a financially secure future.
1According to the IRS, some examples of earned income include wages, salaries, tips, union strike benefits, long-term disability benefits and self-employment earnings. Examples of income that isn’t earned income includes retirement income, social security and unemployment benefits, child support and pay received for work while an inmate is in prison.
2Exception only applies until the child reaches the age of majority or if the child is a student, when (s)he reaches the age of 26, and then the 10-year rule kicks in.