The SECURE Act is the most significant overhaul of retirement and other saving rules in more than a decade. How will it affect your retirement and savings?
Just before the holidays got into full swing, when saving for retirement probably wasn’t on your mind, Congress passed a massive spending bill. While that may not sound like something important for your personal finances, it is.
The SECURE Act is the most significant overhaul of retirement and other saving rules passed by Congress in more than a decade.
The SECURE Act, which is an acronym for Setting Every Community Up for Retirement Enhancement, was attached to the bill and signed into law on December 20, 2019. It’s the most significant overhaul of retirement and other saving rules passed in more than a decade.
In this post, I’ll cover seven significant ways the SECURE Act changes retirement for individuals and the self-employed. The law makes many updates, but the regulations I’ll highlight affect typical Americans the most.
How the SECURE Act affects your retirement
Here’s what you should know about seven main ways the SECURE Act affects your savings and retirement starting as early as 2020.
1. Traditional IRAs can be used longer
One of the most notable changes in the SECURE Act is the opportunity to save more money. Now, you can make contributions to a traditional IRA for your entire life—or at least for as long as you have earned income—just like you can with a Roth IRA. Previously, the cut-off for making traditional IRA contributions was age 70½.
If you plan on working into your 70s, you can continue saving money in a traditional IRA. If you have earned income of $7,000, those over age 50 can contribute up to that maximum amount to a traditional IRA for 2020. If you’re younger than 50, you can contribute up to $6,000.
Now, you can make contributions to a traditional IRA for your entire life as long as you have earned income. Previously, the cut-off for making traditional IRA contributions was age 70½.
The spousal IRA rule also applies, which allows a married couple filing taxes jointly to each max out a traditional IRA, even if one spouse doesn’t earn any income. If you have household earnings of at least $14,000, both spouses over age 50 can contribute up to $7,000.
Making traditional IRA contributions for a more extended period allows you to save more and get valuable tax deductions. Since contributions are tax-deductible and reduce your modified adjusted gross income, they help older workers cut taxes, reduce Medicare premiums, and get the most out of their Social Security benefits. This new regulation can make a big difference for those nearing retirement age who need to beef up savings and create more security for years to come.
2. Retirement account taxes can be deferred longer
Another significant benefit you get from the SECURE Act is that it pushes the age you must begin taking required minimum distributions (RMDs) from 70½ to 72. RMDs dictate a mandatory schedule for withdrawing money from a retirement account and paying taxes on them in a given year.
Delaying required minimum distributions makes sense because people are living longer and commonly working into their 70s.
By delaying RMDs, you defer taxes and allow your retirement nest egg to grow a little bit longer without being drained by distributions and taxes. That makes sense because people are living longer and commonly working into their 70s.
The new regulation applies to all types of traditional retirement accounts if you turn 70½ on or after January 1, 2020. But if you reached age 70½ before January 1, 2020, you must follow the old rules and begin taking RMDs right away.
3. Part-time workers have more access to retirement accounts
According to the most recent data from the U.S. Bureau of Labor Statistics, only 55% of American workers have access to a workplace retirement plan. Many employees indeed work for small businesses that don’t offer a plan. However, part-timers get shut out of many company benefits, with only 36% having access to a retirement plan.
Starting in 2021, the SECURE Act allows more part-time employees to participate in workplace retirement plans where offered. They must work either 1,000 hours in a year or at least 500 hours per year for three consecutive years of service. While it would be great if all employees had access to workplace retirement plans, reducing the number of working hours to qualify is a step in the right direction.
You can contribute to an IRA (Individual Retirement Account) if you have some amount of earned income. So, don’t let the lack of a retirement plan at work keep you from saving.
This legal update should be helpful for part-timers such as new graduates, working parents, and older adults who can’t get or don’t want full-time work. But the law doesn’t require employers to extend matching funds or profit-sharing contributions to part-time employees.
Remember that no matter what company you work for or the number of hours you put in, you can contribute to an IRA if you have some amount of earned income. So, don’t let the lack of a retirement plan at work keep you from saving.
4. Retirement plans can be tapped to start a family
There are limited situations when you can tap a retirement account before reaching the official retirement age of 59½ (or in some cases 55). An early withdrawal that wasn’t previously taxed will be subject to ordinary income tax, no matter why you take it out of a retirement account.
Most early withdrawals will also cost you a 10% penalty—with some exceptions depending on the type of account you have, such as an IRA or a 401(k), and how you plan to spend a distribution.
The SECURE Act authorizes penalty-free withdrawals of up to $5,000 from retirement accounts when used to pay medical expenses to have a child or to adopt. Each parent can tap their accounts within a year of starting a family and avoid that hefty 10% early withdrawal penalty.
While it’s great to have the flexibility to dip into your retirement piggy bank for more reasons, it’s wise not to. The longer you keep your retirement savings growing, the more security you’ll have down the road. Taking out funds means paying income tax and losing the potential investment growth that they could generate.
While it’s great to have the flexibility to dip into your retirement piggy bank for more reasons, it’s wise not to. The longer you keep your retirement savings growing, the more security you’ll have down the road.
5. Retirement contributions have a higher auto-enrollment cap.
With workplace retirement plans that allow auto-enrollment for participants, they typically include a scheduled savings rate increase, such as 1% per year. This escalation ensures that you save a higher percentage of your income over time, up to certain limits.
Before the SECURE Act, the highest allowable automatic payroll escalation of retirement contributions was 10% of wages. But now it’s been raised to 15%, giving employees the benefit of saving a little more each year without having to make administrative changes on their own.
But note that if you participate in a workplace retirement plan, no matter if it includes auto-enrollment and savings escalation, you can always opt-out or change the amount you contribute at any time during the year.
6. Retirement plans are less expensive to set up
When you run a small business, setting up a retirement plan, such as a 401(k), comes with some hassle and expense. Unfortunately, many employees work at small companies that don’t offer retirement benefits.
The SECURE Act makes creating a retirement plan a little more affordable. The business tax credit employers receive for setting up a plan can now be up to $500 per year for up to three years.
7. Retirement plans with auto-enrollment are incentivized
The SECURE Act gives small businesses an incentive to set up a retirement plan that includes automatic enrollment for workers unless they choose to opt-out. Auto-enrollment increases participation and creates higher savings rates in retirement plans, so it's good for employees.
The new regulation gives employers a tax credit of up to $500 per year for three years to offset the expense of setting up a retirement plan or converting an existing plan to one with auto-enrollment. This credit is in addition to the previous one I mentioned, which is for setting up a retirement plan.
How the SECURE Act affects 529 college savings plans
The SECURE Act also includes an exciting change to 529 college savings plans. While this isn’t a retirement account, 529s are used by many people who plan on sending themselves or their kids to college.
The new regulation allows 529 owners the flexibility to withdraw up to $10,000 to repay student loan debt.
The new regulation allows 529 owners the flexibility to withdraw up to $10,000 to repay student loan debt. This expansion will enable parents with excess funds in the account to help children who graduated with education debt. Or if a 529 owner is a student, they can use it to pay off current or future student loans.
To sum up, the SECURE Act is a big deal that made almost 30 rule changes. Many of these regulations are complex and require long-term planning strategies. So be sure to consult with a certified tax accountant or financial advisor to know what’s best for your situation.