SECURE Act: This 2020 legislation may help you save for retirement
A quick SECURE Act summary:
- If you turn 70½ in 2020 or later, you can stay invested in your Individual Retirement Accounts (IRAs) or defined contribution plan (DC) account longer because the age for required minimum distributions (RMDs) is now 72.
- You can continue to contribute to IRAs, regardless of age, if you’re still working and receiving earned income.
- If you inherit money from an IRA or 401(k) plan (from someone other than a spouse), you’ll have to withdraw the full amount within 10 years.
- Starting in 2024, you can start saving in a 401(k) plan if you’re a long-term, part-time employee.
- You can withdraw up to $5,000 from an IRA, penalty-free, to cover childbirth or adoption expenses. You may be able to do the same from a retirement plan.
- You can withdraw up to $10,000 from 529 plans to repay student loans for a beneficiary.
What’s a defined contribution plan?
This legislation pertains to defined contribution (DC) retirement plans, where the employer and/or the employee contribute toward the employee’s individual account. It’s typically tax-advantaged. Because the most common type is the 401(k) plan, we generally refer to that type of plan throughout this story.
Other DC plans include 403(b), 401(a), 457, Thrift Savings Plans, profit-sharing plans, money purchase plans, Employee Stock Ownership Plans (ESOPs), and Savings Incentive Match Plans for Employees (SIMPLE).
The nature of work is changing. People are generally living longer, and some want to work longer, too. An increasing number of people are working freelance or contract jobs (called gig work) where retirement benefits aren’t as common.
The United States retirement system needed an update to meet the needs of this changing workforce. So in late December 2019, Congress passed legislation known as the SECURE Act, offering more access to 401(k) plans for employees of small businesses and giving future retirees more ways to create lifetime income.1
What’s the SECURE Act?
Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act, makes it easier to save for retirement. It also makes retirement plans more accessible to more people. Most changes based on the new law take effect January 1, 2020, but some won’t be in place for another year or more.
7 most important things to know about the SECURE Act
1. RMDs can start at age 72 now.
The age for required minimum distributions will increase from 70½ to 72. That’s good news if you want your money invested for up to two years longer.
- If you’re retired and turned 70½ before December 31, 2019, then you must take the RMD for 2019 and then again in 2020 (even though you’re not yet 72).2
- However, the CARES Act that passed in late March 2020 in response to COVID-19 gives taxpayers the option not to take an RMD in 2020. If you don’t need the money this year, you can hold off on an RMD until next year.
- If you turn 70½ in 2020 or later, you won’t have to take an RMD until you reach age 72 or retire, whichever is later.2
This may give you more time to convert a traditional IRA to a Roth IRA, which doesn’t have an RMD while you’re living. You’ll pay taxes when you convert, but your investments can continue to grow until you pass away, and your beneficiaries will take distributions that are tax-free as long as your account meets the Roth IRA 5-year rule.
(Don’t forget if you retire and keep money in your former employer’s retirement plan, you must take RMDs, too.)
What you can do: If you turn 70½ in 2020 and were planning to take an RMD this year, you may want to work with your financial advisor to review your withdrawal strategy. If you’re looking for an RMD calculator, you can find one on investor.gov.
2. IRA contributions can extend beyond age 70½.
Now if you’re still working and receiving earned income, you can contribute to an IRA regardless of your age. Of course, you’ll also have to take an RMD once you reach age 72 (or if you reached age 70½ before Dec 31, 2019).
“Since a lot of people want to continue working beyond age 65, this means they can keep building retirement savings by contributing to an IRA,” says Tyler De Haan, director of business development—retirement solutions for Principal®.
This change begins with tax year 2020 contributions. So you’ll have until April 15, 2021, to make a contribution for tax year 2020.
About 2019 contributions: You have until July 15, 2020 to make 2019 contributions to your IRA, thanks to the CARES Act passed in March 2020. (Normally, the deadline is April 15.)
What you can do: If you’re interested in learning about an IRA, read 3 steps to get started.
3. Distributions from an inherited IRA and 401(k) must be taken within 10 years now (generally).
Until now, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments over your life expectancy. Meaning, you could choose to receive the payments over your lifetime.
Under the new SECURE Act, you must withdraw the entire balance from a non-spousal inherited IRA or retirement plan within 10 years of the death of the IRA account owner or retirement plan participant. (If you inherited an account December 31, 2019, or before, you’re “grandfathered” and may continue taking distributions over your lifetime.)
There are exceptions to the rule. If you’re a surviving spouse, disabled, or chronically ill, less than 10 years younger than the account owner, or the minor child of the account owner, this new rule doesn’t apply to you.
De Haan says one way this simplified rule gets sticky is if you’ve named a trust as the beneficiary of an IRA or retirement plan. “That’s when you should review your trust documents with your attorney to decide if you want to change strategies in your estate plan.”
Tip: You can also gift IRAs to charities if you don’t want to be taxed on the whole amount over 10 years. “I think we’ll see more of that than we have in the past,” says De Haan.
What you can do: Work with your financial advisor, tax consultant, and/or attorney to review your estate plan for potential changes in light of the SECURE Act.
4. Part-time employees can enroll in a 401(k) plan.
In the past, you generally had to work 1,000 or more hours a year to be eligible to participate in your company’s 401(k) plan.
Starting in 2024, if you've completed at least 500 hours of service each year for three consecutive years and are age 21 or older, you can save in your employer’s retirement plan. The exception: collectively bargained (union) plans or anyone otherwise excluded from plan participation.
De Haan says this is especially helpful to people who have retired from full-time work but want to keep saving for retirement while working part-time somewhere else. (The new law does allow employers to exclude long-term, part-time employees from an employer match or nonelective contribution.)
What you can do: If you currently work part-time and haven’t been able to participate in your company’s 401(k) plan, contact your HR department to see when you can enroll in 2024.
5. Withdrawing money for birth/adoption expenses
The SECURE Act established a new type of penalty-free withdrawal (a waiver from a 10% tax) from an IRA or defined contribution plan for childbirth or adoption expenses up to $5,000 per child. Uncle Sam still takes taxes from that withdrawal, of course, and it must take place within 12 months following the “event.”
You may also make repayments to your retirement plan.
It’s unclear whether the SECURE Act requires all retirement plans to offer this provision and, if they do, what procedures will be required to authorize a withdrawal. (We’ll update this story when we have more information.)
“Until there’s more guidance from government regulators, we anticipate most employers will defer providing this new withdrawal option,” says De Haan.
What you can do: This is a provision you may be able to take advantage of if you don’t have enough money set aside to cover the costs for the birth or adoption of a child. (If you plan to expand your family this year, this article may be helpful: 6 things to do with your money before having a baby.)
6. Withdrawing money from a 529 plan
You can withdraw up to $10,000 from a 529 plan to pay principal and interest on a qualified student loan for a 529 beneficiary, and $10,000 per each of the beneficiary’s siblings. This is a lifetime cap and applies per beneficiary. The money can also be used for the expenses of an apprenticeship program.
What you can do: If you’ve established a 529 plan and have money left over after paying for college expenses, you could use the remaining money to pay down a student loan. To learn more, visit savingforcollege.com.
Update: The CARES Act, passed in late March 2020, also offers student loan relief. Payments and interest on all federal loans held by the U.S. Department of Education will be suspended for six months, until September 30, 2020. So if you decide to continue making payments, you could pay down principal faster.
7. Turning 401(k) savings into lifetime income
Annuities within a 401(k) plan can give participants lifetime income during retirement. The way it works: You convert part of your 401(k) account into a monthly paycheck guaranteed to last the rest of your life.
While some employers have offered this in the past, the SECURE Act makes it easier for a business to offer annuities as another investment option for their 401(k) participants.
What you can do: If your employer chooses to offer in-plan annuities as an investment option, you will be notified. This part of the law will take a few years to be fully implemented by employers who choose to offer it. In the meantime, talk to your financial advisor to see if an “in-plan” annuity should be part of your retirement income strategy, if it becomes available to you.
If you own a business
De Haan says some of the best news in the SECURE Act pertains to ways small businesses can help their employees increase their long-term savings.
- Multiple Employer Plans (MEPs): If you’re a small business owner, there’s a new way to set up a retirement plan for your employees. While it doesn’t take effect until January 1, 2021, a new rule allows two or more businesses to band together to offer a single plan (a MEP) to their collective employees. The businesses don’t have to be in the same industry, and a “pooled plan provider” acts as the retirement plan administrator, taking key responsibilities off the plate of small businesses.
“This is good news because it will help more people have access to workplace retirement plans by making it more affordable for small businesses to establish and maintain a valued benefit. And for employers competing for talented workers in a tight labor market, MEPs offer a more streamlined option to administering a retirement plan,” says De Haan.
- Tax credits: Small business owners (100 or fewer employees) can receive a tax credit for 50% of their costs for starting a retirement plan (up to a $5,000 tax credit each year for three years). They can also get up to a $500 tax credit for three years for automatically enrolling employees into their retirement plans.4
What to do next
- Want to talk to someone about how the SECURE Act may affect you? Find an advisor near you to discuss a plan.
- Learn more about Scholar's Edge 529 Plan, with investments managed by Principal.
- Have a retirement account from your employer with service through Principal? Log in to principal.com to see if your mix of investments is on point. First time logging in? Get started.
- Opening an Individual Retirement Account is an ongoing way to save for retirement on your own. Learn more about an IRA with Principal.
1 The SECURE Act was included in the Further Consolidated Appropriations Act, 2020, with other legislation that impacts retirement plans.
2 If you own 5% or more of a business, consult your tax advisor about how RMDs may affect you.
3 IRA contributions may or may not be deductible depending upon income levels and participation in a plan. Consult your tax advisor to learn what it means to you.
4 This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only.
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