In late December, while most of us were distracted, the president signed the Setting Every Community Up for Retirement Enhancement Act. The SECURE Act was intended to remedy the disappointing fact that only slightly more than half of Americans participate in retirement plans at all and that many of those who do have inadequate savings for their situations.
To encourage more participation, it loosens the eligibility rules for retirement plans in several ways. Some of those looser rules provide substantial advantages to Americans who are in a position to take advantage of them. Read on to learn how you might be affected.
SECURE Act Benefits for Working Adults
One of the marquee provisions of the SECURE Act is aimed at people in their early 70s who aren’t quite finished working. The law lifts the age limit on contributions to a retirement plan, permitting people over 70 and a half years old to continue making retirement plan contributions as long as they are still working. In addition, the law raises the age at which Americans are required to start taking contributions from their plans (required minimum distributions) from 70 and a half to 72.
The SECURE Act also makes it easier for workers—of all ages—to purchase an annuity through their employer-sponsored 401(k) plans. An annuity provides a guaranteed lifetime income, but employers rarely offered them before, because they were afraid they’d be sued if they chose to offer a plan that later went bankrupt. That could leave their employees who purchased the plan with nothing for their money.
The SECURE Act encourages annuities by reducing employers’ legal liability in case the annuity company goes bankrupt. It also allows annuity plans to be “rolled over” into a new plan when the worker changes jobs and requires “lifetime income disclosure statements” showing how much money a worker could receive per month if they invested in an annuity.
Furthermore, the SECURE Act permits part-time employees to sign up for plans, as long as they either work 1,000 hours a year or have worked 500 hours a year for each of the past three years. And for those workers whose employers auto-enroll them in retirement plans, the SECURE Act lifts the cap on auto-enrolled contributions from 10% of the worker’s wages to 15%, encouraging more savings.
Benefits for Parents and Families
One of the few pieces of bad news in the SECURE Act is for people who inherit a 401(k) or IRA from someone other than their spouse. Those people are no longer permitted to stretch disbursements from the inherited account over their lifetimes. Rather, they will be required to disburse the entire amount within 10 years of the account holder’s death. There are exceptions for minor children, people close in age to the account holder, and people with disabilities or chronic illness.
However, there’s good news in the bill for families as well. If you’re starting a family in 2020 or beyond, the SECURE Act permits you to borrow up to $5,000 from your defined contribution to cover the cost of a birth or adoption. This will not be subject to the 10% penalty for early withdrawals, and you can repay it as a rollover contribution.
The SECURE Act also permits parents of young adults to repay their kids’ student loans using money that’s leftover in a 529 college savings plan. They may pay up to $10,000 over the student’s lifetime.
Big News for Small Business
If you read the above section on annuities, you already now one advantage the SECURE Act offers to employers: a “safe harbor” for employers who offer annuities as part of a 401(k) plan. The Act offers other advantages to small businesses, defined here as businesses with 100 employees or fewer.
If those employers create a 401(k), SEP IRA, profit sharing or SIMPLE savings plan for their employees within the next three years, they are entitled to tax credits. The details vary according to the employer’s situation, but the credit is $250 for every employee who is not a highly compensated employee, with a minimum tax credit of $500 and a maximum tax credit of $5,000. If it’s an auto-enrolled plan, the employer is eligible for another $500 tax credit.
If you’d like to talk to a knowledgeable retirement planning attorney about your situation and your options, call AEGIS Law today. You can reach us through our website or call (314) 454-9100.