Did you know that, in May, the U.S. House of Representatives passed potentially the most significant retirement-savings legislation in recent years? The Setting Every Community Up For Retirement Act, or the SECURE Act of 2019, has the potential to help millions of Americans achieve their retirement savings goals.
To better inform you about the SECURE Act and how it may affect you, let us share with you some information about the new retirement-savings legislation.
The SECURE Act has many different provisions, including annuity adoptions, the expansion of 529 plans, a boost in small business 401(k)s, more time in IRAs and 401(k)s, and part-time workers’ benefits. With regard to IRAs and 401(k)s, Americans will be permitted to wait until the age of 72 before making required withdrawals. Additionally, the SECURE Act may also repeal the maximum age for traditional IRA contributions, which is currently at 70 ½ years old.
The SECURE Act also has significant implications for part-time workers and may encourage those workers to save more money for retirement. The bill would require 401(k) retirement plans offered by employers to allow part-time workers, who work on a permanent basis, to participate. To qualify, workers will be required to have worked 500 or more hours a year for at least the last three consecutive years.
When it comes to annuities, the SECURE Act will allow 401(k) plans to add annuities for employees.
Annuities are insurance policies that turn retirement savings into income. While annuities traditionally have been less than popular in 401(k) plans due to the high fees associated, the SECURE Act would encourage retirees to convert part of their 401(k) plans at retirement into deferred annuities. This, in turn, has the potential to help people manage their income more effectively.
Additionally, for those with children, the SECURE Act will expand the use of 529 plans.
This student loan provision has a lifetime cap, however, parents will now be able to use the plan to pay back the loan for both the recipient of the 529 plan and any siblings up to a $10,000 limit. Further, the new “kiddie” tax changes affecting children that began in 2019 would be repealed, although individuals could elect to use the tax rules from 2018, if so desired.
Finally, what is perhaps the most important change that the SECURE Act proposes, you may ask?
Additional limitations may be imposed on Stretch IRAs, which could result in more taxes being paid. A Stretch IRA is a useful estate planning tool that allows us to create a tax shield to “stretch” across decades. The longer the IRA lasts, the more income can be shielded from taxes. The SECURE Act, however, could change this process. Instead of IRA funds being “stretched” over decades, they may be spread over a significantly shorter period of time, reducing the potential tax shield by as much as decades.
We know this can be a complicated topic to understand, which is why we wanted to share with you an overview of the key provisions of the SECURE Act and how it may affect you. If you have questions about anything discussed in this article, do not wait to contact our office to set up an appointment.