The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, came into effect at the start of the year and is the most important retirement plan legislation in over a dozen years.
The legislation was driven by an acknowledgement that 1) only a little more than half of Americans participate in retirement plans; and 2) the plans of folks 65 and older hold less than $60,000. Life expectancies are increasing, and the cost of retirement is going up as well.
With the Social Security system coming under increasing pressure, small businesses needed encouragement to set up private retirement plans and workers needed incentives to contribute as much as possible to them.
The act encourages small businesses to set up retirement plans by:
• Giving an annual $500 tax credit to employers who start plans with an automatic enrollment feature.
• Raising the “safe harbor” from 10% of wages to 15%.
• Enabling businesses to enroll part-time employees.
• Permitting penalty-free withdrawal of $5,000 ($10,000 per couple) from an account to pay for adopting or having a child.
• Allowing the use of 529 plans for student loan repayments, up to $10,000 annually.
• Loosening the requirements for adding annuities as an investment option.
The new law makes big changes to the qualified plan contribution and withdrawal rules:
• When you contribute to a qualified retirement plan, such as an IRA or 401(k), you receive a deduction against federal income taxes. Conversely, when money is withdrawn from a plan, it is subject to income taxes. Before 2020, you had to begin withdrawing money (Required Minimum Distribution, or “RMD”) from a plan in April following the year in which you reached 70 1/2. That age is now increased to 72. If you are already taking your RMD, you will continue doing so as before, even if you are younger than 72.
• The new rule lets you keep contributing to a retirement plan after 70 1/2 – provided you have earned income.
• Under prior law, a beneficiary of an inherited plan could calculate an RMD using his statistical life expectancy. This meant a 20-year-old had 50-plus years to let the retirement account compound tax-deferred. Now, the owner of an “inherited IRA” has only 10 years to withdraw the money. An important point: You can wait until the end of the 10th year to withdraw the money; you do NOT have to take some out every year.
• For a minor child of an IRA owner, the 10-year withdrawal time period does not start to run until the age of majority.
• If you had an inherited IRA before 2020, you may continue using your life expectancy for your RMD, as can disabled beneficiaries.
• Spouses continue to have the ability to roll a deceased spouse’s plan into their own.
With the Social Security Trust Fund coming under increasing pressure as baby boomers retire, the government wanted to increase the responsibility of the individual in providing for retirement. The Secure Act surely will help work toward this goal, at the same time encouraging workers to stay in the workforce and keep saving a bit longer.