The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was passed by Congress in late December 2019. This new law modifies the features of the retirement accounts that you may already have, and generally makes it easier for people to use these accounts to save for retirement. Here are a few highlights that you should be aware of:
- New age for Required Minimum Distributions (RMD). If you turn 70½ in 2020 or later, you can keep money in a tax-deferred IRA or 401(k) for another 18 months to help the account continue growing before starting to withdraw funds. This retirement benefit is now available thanks to the required minimum distribution age being raised from age 70½ to age 72.
- No maximum age for traditional IRA contributions. While taxpayers have always been able to contribute to a Roth IRA at any age, age 70½ was the cut-off for making contributions to a traditional IRA. You can now contribute to a traditional IRA at any age provided you have earned income.
- Some part-time workers eligible for employer 401(k). Most part-time workers have never been eligible to participate in an employer’s 401(k) plan. The SECURE Act now mandates employers who maintain a 401(k) plan to offer their plan to employees who work more than 1,000 hours in one year, or 500 hours over 3 consecutive years.
- Use retirement funds for birth or adoption without penalty. Each parent can withdraw $5,000 out of their retirement account without the 10% penalty that previously existed. The distribution, however, must still be reported as taxable income. The distribution can be repaid as a rollover contribution to an eligible defined contribution plan or IRA.
- Maximum auto-enrollment amount increased. Many people don’t save enough for their retirement. So in order to make saving a little less painful, the new law allows businesses to automatically transfer a greater portion of your paycheck into their retirement plan. The maximum contribution that can now be automatically deferred into your employer’s 401(k) plan increases from 10% to 15%.
For many of us, retirement planning is a task that we promise ourselves that we’ll get to “someday.” The changes introduced by the SECURE Act are a great opportunity to make that plan today and evaluate how your strategy for retirement saving might be affected by this new law.