What Is the SECURE Act?
The House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act on May 23, 2019. If the bill, which has more than 20 sections, passes the Senate and is signed by the president, its impact could lead to shifts in retirement savings and planning. "Many of the sections will only affect a small portion of the population, while others will affect all workers and retirees," says Scott Michalek, a senior financial advisor at Wescott Financial Advisory Group in Philadelphia.
If the SECURE Act passes into law, you can expect:
-- More part-time workers to have the opportunity to participate in a 401(k) plan.
-- The chance to contribute to traditional IRAs for as long as desired.
-- The minimum distribution age for retirement accounts to shift from 70 1/2 to 72 years old.
-- Penalty-free withdrawals to be allowed for special circumstances.
-- A requirement to withdraw from inherited retirement accounts within 10 years.
Read on for a look at how the SECURE Act could affect your retirement planning.
[Read: New 401(k) and IRA Limits for 2019.]
More Opportunities for Long-Term Savings
The legislation would allow for multi-employer 401(k) plans, meaning it would be less costly for small employers to start and maintain retirement plans for workers. It would also permit part-time workers to participate in 401(k) plans.
Currently, employees can contribute to a traditional individual retirement account up to age 70 1/2. There are also limits regarding how much can be placed into the fund each year. For 2019, workers under age 50 can contribute up to $6,000. Individuals who are 50 or older can contribute up to $7,000. Under the SECURE Act, "The age limit would be removed entirely, although income limitations for contributions would remain," Michalek says.
Under current laws, retirement account owners must begin to withdraw funds when they turn age 70 1/2. "If the SECURE Act is passed by the U.S. Senate, the required minimum distribution age for retirement accounts would be increased from 70 1/2 to 72," says Bob Castaneda, program director for Walden University's accounting and finance programs. This would give workers an additional 18 months to take advantage of the tax benefits provided with retirement accounts before beginning withdrawals.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
The Ability for New Parents to Withdraw
Under current law, you must be 59 1/2 years old to withdraw from a traditional IRA or 401(k) plan. If you take out funds earlier than that, you will usually have to pay a penalty of 10% on the amount withdrawn. However, there are several exceptions to this rule. Penalty-free withdrawals can be made for certain circumstances, such as large medical bills, a disability, a first home purchase and higher education expenses.
Under the SECURE Act, new parents would be able to withdraw funds without facing penalties. The legislation would permit withdrawals for qualified birth and adoption expenses. "This is a positive for younger people who have a high-deductible medical plan and are shocked at the high out-of-pocket medical expenses related to childbirth," Michalek says. The limit on the distribution would be $5,000 and would need to be claimed within one year of the birth or adoption.
This provision might help individuals who don't have funds in a health savings account or other savings account to cover the cost of a new addition to the family. At the same time, withdrawing funds early from a retirement account also means taking away the chance for money to grow tax-deferred during the next decades.
[See: 11 Ways to Avoid the IRA Early Withdrawal Penalty.]
Inherited Accounts Will Need to be Distributed
Individuals who have an IRA or a defined contribution plan may be planning to pass the account on to a child or heir. "Under current law, the after-death required minimum distribution rules permit a designated beneficiary to draw down the remaining plan benefits over the beneficiary's life expectancy," says Adam Bergman, president of IRA Financial Trust Company in Sioux Falls, South Dakota. This allows the child to stretch the value of the IRA and take advantage of potential tax breaks.
The new legislation would not allow heirs to continue to withdraw funds throughout their lifetime. "Under the SECURE Act, on the death of an IRA owner or defined contribution plan participant, the individual beneficiary would be required to draw down his or her entire inherited interest within 10 years," Bergman says.
For example, if you are age 50 and inherit your father's IRA when he passes away, you would need to distribute 100% of the assets during a 10-year period. That's a change from the current law, which would let you distribute the assets during your life expectancy. If your life expectancy is age 84, you are currently able to stretch the distributions over a 34-year period. "If you are working during that 10-year period, you will likely pay substantially more taxes on the IRA assets than if you had the ability to stretch those taxable distributions over a 34-year period," Michalek says.
There are certain times when the 10-year period would not apply, such as in the case of a spouse, as well as disabled or chronically ill beneficiaries. There are also exceptions in place for minors and beneficiaries who are not more than 10 years younger than the account owner.
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