New rules around retirement plans affect workers, retirees and the small business community.
Usually, we try and make Coffee Break on the lighter side, but a new law will affect so many older adults we decided it was important to make sure readers were aware of it.
The new year starts off with a bang for retirement savers as the SECURE (Setting Every Community Up for Retirement Enhancement) Act goes into effect on the first day of January. The bill increases access to tax-advantaged accounts, nudges back the age for required minimum distributions (RMDs) and includes other changes to help keep Americans from outliving their assets.
Employer Plans Affect Workers
Under the SECURE Act, employers are no longer required to share common characteristics to pool retirement plans, making it easier to enjoy the economy of scale. Part-time workers who log at least 1,000 hours in a year or 500 hours in three consecutive years will be eligible for employer-sponsored retirement plans.
Studies have shown that auto-enrollment significantly increases plan participation. The SECURE Act encourages employers to use automatic enrollment by offering a tax credit to offset the cost of a 401(k) or SIMPLE IRA (Individual Retirement Account), in addition to a start-up credit. Some states have already stepped into the arena, creating their own automatic-IRA plans.
“This is probably the biggest thing that could improve the retirement outlook for people,” according to Alicia Munnell, director of the Center for Retirement Research at Boston College.
Retired Minimum Distribution Age Rises
The bill moves out the age when traditional retirement account holders must begin taking distributions. The change adjusts the age from 70.5, a number which endured from life expectancy tables in the early 60s, to 72. Some may take advantage of the change to work longer, while others can use it to increase Roth conversions or for other tax implications.
“Pushing back RMDs will help people make their money last just a little bit longer, especially since more of them need to work later,” says David Rae, a financial planner in Los Angeles.
Stretch IRA is Gone
Those planning to leave money in an IRA account to a non-spouse heir may need to rethink their options. Previously, many heirs could take the money out over their lifetime, using a distribution based on life expectancy and age. But now, Uncle Sam is requiring the complete withdrawal of the money within a ten-year span after the death of the account holder. Use this calculator to see how the change could affect someone who is not a spouse when inheriting an IRA. The change is expected to put an estimated $15.7 billion into IRS coffers.
The insurance industry lobbied hard to encourage employers to offer annuities in 401(k) plans, and the new rules remove legal liability from the employer. Annuities provide guaranteed income over the course of retirement, providing a steady stream of money as pensions have largely dried up. However, they are complex investment products with hefty fees, and investors should make sure they understand exactly what they are signing up for if they choose an annuity.
The bill also now allows the use of tax-advantaged 529 accounts to repay qualified student loans, up to $10,000 per year. The cost of adopting a child can be defrayed with up to $5,000 from a 401(k) account, penalty-free.
While the provisions contained in the bill are not earth-shattering, they will make a difference for many. There are enough changes that it is likely that something in the bill will affect you or someone you know. Talk over any changes and make sure your financial plan accommodates the new rules.
Click below for the other articles in the January 2020 Senior Spirit
Health – Should You Start Medicare If You Work Past 65?
Money – How Returning to Work Impacts Social Security Benefits
Blog posting provided by Society of Certified Senior Advisors