In January, the Setting Every Community up for Retirement Enhancement Act of 2019 was enacted. The ACT, which is referred to as the SECURE Act, should help Americans take greater control over their retirement funds. The Act describes about 25 provisions, so we will focus on the key changes that will likely have the greatest impact.
What key changes were made by the SECURE Act?
- Required minimum distributions (RMDs) now begin at age 72 (instead of 70½).
- Income earners over age 70 can make contributions to their traditional IRA.
- Distributions for non-spouse beneficiaries must be depleted within 10-year window.
- Parents can withdraw up to $5,000 from their retirement account(s) for qualified birth or adoption expenses.
- Long-term, part-time employees can participate in a 401(k) plan.
- Small business owners will receive a tax credit for starting a retirement plan.
How will the key changes affect you?
The biggest change introduced by the SECURE Act is that, for those who turn 70½ after December 31, 2019, RMDs won’t begin until age 72. Currently, RMDs must begin by April 1 of the year after the account owner turns 70½. This will be good news for those who would like to allow their money to grow tax-deferred for as long as possible.
Compounding that good news, account owners can continue to make contributions to a traditional IRA for as long as they earn an income. Roth IRAs already allow contributions by income earners of any age, so there is no change for owners of Roth IRAs, but if you have a traditional IRA and earn an income, you can continue to contribute (even after you begin taking RMDs at the age of 72).
On the downside, the “stretch” provision, which allowed non-spouse beneficiaries of a retirement plan to withdraw funds over their lifespan, has been eliminated in most cases. Most beneficiaries must now take all distributions within a 10-year window. The new rule prevents taxpayers from using their retirement account to avoid taxes over one or more generations, but it will negatively affect those who hoped to defer taxes on their funds until later in life.
There are some exceptions to the rule. If the beneficiary is disabled, chronically ill, not more than ten years younger than the retirement account owner, or a child of the owner who has not reached the age of majority; they can continue to use the “stretch” provision.
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The Act also takes care of new parents. Though it’s generally not advisable to withdraw funds from your retirement account to cover pre-retirement needs, new parents will now be able to withdraw up to $5,000 from their retirement account before age 59½ to cover qualified expenses for childbirth or adoption without having to pay a 10% early withdrawal penalty.
In the past, most part-time employees were not allowed to participate in their employer’s 401(k) plan. The SECURE Act has changed that, allowing long-term part-time employees (who are not part of a collectively bargained plan) to join. To be eligible, the employee must have completed at least 500 hours of work for three consecutive years and must be 21 years of age or older.
Small business owners will also benefit from the SECURE Act, which offers multiple incentives for small business owners who sponsor retirement plans. For starters, the Act increases the credit for plan start-up costs. It also offers a tax credit for structuring the plan to include auto-enrollment.
There are so many changes. What now?
Despite all the changes of the SECURE Act, a lot didn’t change. For example, there are still annual contribution limits and income limits for qualified contributions. You are still liable for potential fees and interest on early withdrawals and you will have to pay income tax on withdrawals from your traditional IRA. If you have any questions about your retirement account, speak to your plan administrator or financial advisor. This is also a good time to check the beneficiaries associated with your retirement accounts to make sure your money is going to the right people and that they are aware of the new rules regarding retirement accounts.
Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, which is not an affiliate of the credit union. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. FR-2953696.1-0220-0322
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