The retirement planning process is looking a bit different now that the SECURE Act (Setting Every Community Up for REtirement) has taken effect. However, the SECURE Act is relevant to you even if retirement is many years away. This law includes regulations that benefit children, new college graduates, new parents, foster parents, small business owners, and more. Regardless of whether you’re retired, or plan to retire someday, it’s important to educate yourself about these changes. View the recording of our recent webinar to hear what I think are the most important provisions.
IRA contribution age limits have changed
Under the SECURE Act, some IRA rules have changed. Retirees are no longer required to claim their IRA distributions at 70 ½ years old. That age limit has been removed, and the new required minimum distribution (RMD) age is 72. This change allows individuals to continue contributing to their retirement plans beyond the age of 70, provided they are W-2 employees.
Stretch IRAs are no longer permitted
What happens to all those hard-earned contributions and earnings once you die? Gone are the days of IRA balances being stretched over decades and being passed from family member to family member. The SECURE Act requires that the entire balance of the account must be distributed within 10 years following the original owner’s death. When the funds are withdrawn is up to the beneficiary, as long as the account balance is zeroed out within 10 years. Remember, taxes are paid at the time of distribution, so be sure to consider the current tax rates and discuss your options with a financial advisor.
We believe this could present some challenges, especially for beneficiaries who are children or young adults, as a sizable distribution each month could lead beneficiaries to change their lifestyles. But what happens when the money stops? We suggest setting up a trust and reviewing any conduit language. One of the many benefits of using a trust is that it will accumulate the RMDs and distribute them over a greater length of time—potentially preventing your beneficiaries from making reckless financial decisions. Not all beneficiaries are bound by this ten-year rule. Spouses and “eligible designated beneficiaries,” (children who are minors, disabled, or chronically ill; or a sibling beneficiary who is less than 10 years younger than the decedent) can take out contributions over the course of their life expectancy.
401(k) plans and small business retirement plans
Beyond individual retirement plans, the SECURE Act also contains provisions for 401(k)s and small businesses. This new law offers small business owners tax credits on retirement plan start-up costs, and when they launch auto-enrollment plans on behalf of their employees. The SECURE Act is also making it easier for small businesses to work together by introducing a multi-employer retirement plan. Business owners can pool their resources to offer retirement plans to their employees while saving on administrative costs.
Retirement plans for part-time employees
If you weren’t able to contribute to a 401K in the past, you may be able to soon. Starting in 2021, part-time employees who work at least 500 hours per year will be eligible to contribute to a retirement plan. In addition, college students and foster parents may be able to begin saving for retirement sooner. Under the new law, fellowship stipends and foster care payments are now considered compensation and can be used to make contributions to an IRA.
Education expenses and apprenticeship programs
As you can see, the SECURE Act has a significant impact on the retirement planning process, and its reach goes even further. Qualified education expenses for 529 plans have expanded. Students who graduate with money remaining in their accounts can use the funds to repay up to $10,000 in student loans. 529 plans can now also be used to pay tuition for apprenticeship programs. Other benefits of the SECURE Act include new penalty-free withdrawals from retirement savings plans to pay for costs associated with childbirth or adoption.
With so many changes and options to consider, you may be feeling uncertain about your retirement plan. We encourage you to sit down with an expert and create a plan specialized for you and your loved ones. Contact us to schedule a free consultation.