The most significant legislation affecting retirement was signed into law on Friday, Dec. 20, 2019. After stalling for months, Congress suddenly passed several bills, as attachments to budget appropriations, as reported by Advisor News’ article “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans.”
Here are some of the key points that retirees and those planning their retirements need to know:
Changes to Age Limits for IRA and 401(k) Accounts. The age for taking Required Minimum Distributions (RMDs) has increased from 70½ to 72 years. Adding a year and a half for investors to continue deferred growth for retirement gives a little more time to prepare for longer lifespans. The change recognizes the prior limits were arbitrary, and that Americans need to save more.
New Restrictions for Inheriting IRAs. The SECURE Act also enacted strict limitations on the usage of the “stretch” IRA. With few exceptions, Americans who inherit an IRA must now withdraw the money within 10 years of the account owner’s death, along with paying taxes. Some of the exceptions include surviving spouses and minor children. These exempt heirs can still spend down inherited IRA accounts over their lifetime, otherwise known as “stretching” the IRA.
Small Business 401(k)s. The SECURE Act expands access to Multiple Employer Plans, known as MEPs, so that employers with only a few employees can pool resources and share the costs of retirement plans for employees. This will cut administration and management costs, which will ideally allow more small businesses to offer higher-quality retirement plans to their employees.
The law also enhances automatic enrollment and auto-escalation, letting companies automatically enroll employees into a retirement plan at a rate of 6%, instead of 3%. Employers can now raise employee contributions to a maximum of 15% of their annual pay, although workers can opt out of these plans at any time.
Annuities Options. The SECURE Act now allows 401(k) plans to offer annuities as a retirement plan option. Experts have mixed opinions on this. Annuities are a type of life insurance that convert retirement savings into lifetime income. However, fees are often high, and if the insurance company closes its doors, those lifetime income payments may vanish. Under the new law, employers also have what’s called a “safe harbor” from being sued in the event that annuity providers go out of business or stop making payments to annuity purchasers. Being freed from liability may make employers more likely to offer annuities, but that may put 401(k) investors at more risk, say consumer advocates.
529 Plans and Saving for Children. The new law expands 529 accounts to cover many more types of education, such as registered apprenticeships, homeschooling, private elementary, secondary or religious schools. Up to $10,000 can be used for qualified student loan repayments, including for siblings.
Reference: Advisor News (December 23, 2019) “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans”