What Does the Recently Enacted SECURE Act Mean for Your Retirement Plans?

Congress’s primary goal in passing the SECURE Act was to improve upon the success of our nation’s private employer-based retirement system. The law seeks to accomplish this by encouraging more individuals to save for retirement. According to the U.S. Bureau of Labor Statistics, almost half of Americans who work in the private sector do not take advantage of their employer’s retirement plan.

Perhaps as importantly, the SECURE Act also gives individuals more freedom in how they manage their retirement savings.

In this article, we’ll cover the basics of the SECURE Act and provide insight into what it means for your personal finances, both now and in the future.

Does the SECURE Act make it easier to save more for retirement?

Yes. The authors of the SECURE Act recognize that more Americans and living and working longer. Therefore, under this new law, you can continue to make Individual Retirement Account (IRA) contributions beyond age 70½. Under previous legislation, you could not contribute to an IRA if you were 70½ or older.

This change means that the rules for traditional IRAs now align more closely with 401(k) plans and Roth IRAs.

To take advantage of these new rules, you will need to furnish proof of earned income, either in the form of salary, wages, or self-employment income.

Additionally, beginning in 2020, the contribution limit for an IRA rose to $6,000, or $7,000 if you are 50 or older. If, as of 2020, you and your spouse are 71 or older and still working, you can contribute up to $7,000 to an IRA in each of your names, or $14,000 total.

Depending on your circumstances, these IRA contributions may also be tax-deductible.

What effect does the law have on the required minimum distribution (RMD)?

As the Internal Revenue Service (IRS) puts it quite plainly, “You cannot keep retirement funds in your account indefinitely.” Once you reach a specific age, you are required by law to withdraw money from your retirement accounts. The minimum amount you must withdraw from your IRA, 401(k), etc., account(s) each year is known as the required minimum distribution (RMD). If you do not take your RMD or take a contribution lower than your RMD, you could end up paying a significant tax penalty: up to 50 percent of the RMD itself.

Previously, you were required to begin taking a required minimum distribution (RMD) the year after you turned 70½. Now, you can wait until you are 72 before taking your RMDs. That means you have more time to let your principal grow. Remember: the larger the principal, the higher its earning potential.

What effect does the new law have on inherited IRAs and taxes?

Before the passage of the SECURE Act, individuals who inherited retirement savings could stretch out their withdrawals and required tax payments on each distribution over their life expectancy. Now, those beneficiaries are required to withdraw those inherited assets within 10 years.

There are, however, some beneficiaries who are exempt from this rule. They include:

• Surviving spouses.
• Minor children.
• Disabled and chronically ill beneficiaries.
• Any individual who is not more than 10 years younger than the deceased participant or IRA owner.

On the other hand, if the inheritor does not fall into one of these exempted categories, they could inherit what amounts to a tax “time bomb.” Remember, IRA and 401(k) contributions consist of pre-tax dollars. Once you begin taking distributions (that is, withdrawals) from these accounts, those distributions are treated as income and taxed. The IRS assesses taxes on this income based on your tax bracket.

To avoid passing on a huge tax burden to their beneficiaries, affluent individuals might consider one of the following:

• Converting their IRA to a Roth IRA and settling the tax bill now.
• Closing their current IRA, paying the taxes, and use the remainder to establish a life insurance policy.
• Working with their financial adviser and an attorney to create a charitable remainder trust (CRT) that provides for the distribution of assets over a more extended period.

How does the SECURE Act affect small businesses?

In the past, many small businesses found it too costly to provide a 401(k) option for their employees. The SECURE Act addresses this issue by providing a tax credit to small business owners for establishing a workplace retirement plan. These tax credits can total up to $5,000 per year for three years.

These small businesses can employ up to 100 workers, and they can earn an additional available tax credit — up to $500 for three years — if their plan includes automatic enrollment.

In addition to these tax credits, the SECURE Act gives small businesses greater access to multiple employer plans (MEPs). Previously, companies may have shied away from participating in an MEP because of the so-called “bad apple rule.” This rule stipulated that all employers participating in an MEP could face adverse tax consequences if one employer failed to satisfy the program’s qualifications.

The SECURE Act also facilitates the adoption of MEPs by allowing completely unrelated employers to participate in an MEP.

What are the provisions in the SECURE Act regarding annuities?

The SECURE Act opens the gates for more employers to offer annuities as an investment option within their 401(k) plans. In the past, employers held the fiduciary responsibility to ensure these investments were appropriate for their employees’ portfolios. Under the new SECURE Act rules, the burden falls on the companies that sell the annuities to offer proper investment choices.

The upside of this option is that annuities provide a guaranteed income over a retiree’s lifetime. The downside is that annuities are complex investment products. Investors would be well-advised to carefully consider their options and consult a financial adviser before moving forward with an annuity plan.

How does the SECURE Act affect part-time employees?

The SECURE Act provides ways for more part-time employees to become eligible for a 401(k) plan. In the past, part-time employees needed to work at least 1,000 hours during a 12-month period to be eligible to contribute to a 401(k) plan. Under the SECURE Act, employees who log at least 500 hours during a 12-month period for three consecutive years can contribute to a 401(k) plan beginning. This rule takes full effect in 2024.

These new requirements mean that it’s essential for part-time workers to keep accurate records of their hours of employment if they wish to take advantage of their company’s employment plan.

Finally, the SECURE Act imposes no requirement for employer matches or other employer contributions to any plans established for part-time employees.

How does the SECURE Act benefit parents?

The SECURE Act allows parents to withdraw up to $5,000 from their retirement savings after the birth or adoption of a child. Parents will not incur a penalty for this making this withdrawal, and the law allows the distribution amount to be re-contributed to the plan. However, income tax will be due on the distribution if it is not repaid to the account.

The SECURE Act also contains good news for parents managing a 529 college savings plan. They can now use federal income tax-free distributions from these accounts to pay down up to $10,000 (principal and/or interest) in qualified student debt. Parents can also use tax-free 529 distributions to cover the costs of an eligible apprenticeship program.

No matter how much or how little you’ve saved toward your retirement, Guaranty Bank & Trust’s financial experts offer guidance to help you grow. Learn more about the retirement products we provide or explore our comprehensive Wealth Management services. If you have questions or feel ready to begin collaborating with one of our friendly and caring bankers, you can easily request an appointment online. We look forward to helping you plan a safe, secure, and prosperous future for you and your family.