If you’ve got a 401(k) or IRA, a brand new piece of legislation called the SECURE Act is making some of the biggest changes to the retirement landscape you’ve seen in recent years.
The SECURE Act: What It Means for You
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is legislation that promises to change the way Americans save for retirement and spend down their retirement savings.
No matter whether you’re still working or already in retirement, this is going to affect you!
In this article, we’ll take a look at what the SECURE Act is, plus the big changes coming to 401(k) plans at work, required minimum distributions from retirement accounts for senior citizens and more.
The SECURE Act: Table of Contents
- Understanding the SECURE Act
- Required Minimum Distribution Age
- Maximum Age for Traditional IRA Contributions
- Part-Time Workers and 401(k) Plans
- Stretch IRA Changes
- Other Miscellaneous Changes From the SECURE Act
Understanding the SECURE Act
In late December 2019, President Trump signed the SECURE Act into law. With it comes a lot of changes both for people in their golden years spending down their nest egg and for those who are still saving for retirement.
Broadly, the SECURE Act raises the age limits on a couple of key things when it comes to saving and spending retirement money and expands access to better 401(k) plans for small businesses and part-time employees.
Now let’s dig into the specifics…
Required Minimum Distribution Age
- You no longer have to do your RMDs at age 70 and a half
- You can now start them at 72
With Americans working longer and retiring later, there’s not necessarily a need for required minimum distributions (RMDs) from your IRA or 401(k).
So, the SECURE Act raises the age on RMDs from 70.5 to 72. That gives your money longer to grow as you approach retirement.
However, we should note that if you turned 70.5 in 2019 — when the old rules were still in force — you can’t benefit from this change of age in RMDs. You’re grandfathered in under the old rules.
Maximum Age for Traditional IRA Contributions
- You no longer have to stop making contributions at 70 and a half
- There is no age limit now
As our life spans increase, there’s a need to be able to stash away extra cash to cover our increasingly longer golden years. That’s why the age limit on traditional IRA contributions is going away.
Previously, you could only contribute to an IRA through age 70.5. However, under the SECURE Act, you’ll now be able to contribute for as long as you’d like. This provision officially gets underway for tax year 2020, meaning you’ll have until April 15, 2021, to make IRA contributions for tax year 2020.
Part-Time Workers and 401(k) Plans
- Employers are now required to allow part-time employees who work at least 1,000 hours annually to contribute to their company’s 401(k) plan
- You can also work 500 hours for three consecutive years and qualify for this provision
The job market is booming, but not everyone who is employed has or even wants a full-time work schedule. The SECURE Act recognizes that and extends the ability to participate in your company’s 401(k) plan, if available, for many part-timers.
Gone are the previous rules that limited 401(k) access to only full-timers. Now part-timers who work 1,000 hours in a year or 500 hours for three consecutive years can participate, too.
However, part-time employees in collectively bargained plans are exempt from this change.
Stretch IRA Changes
- The so-called “stretch IRA” has been eliminated
- Now, you must draw the whole balance down on an inherited IRA in 10 years or less
It used to be that if you inherited an IRA or a 401(k) from a parent, you had the option to spend it down over your entire lifetime — effectively stretching it out over your remaining years. This was particularly helpful to grown children in their prime earning years because it helped limit their tax liability from all that extra money in their life.
But the SECURE Act requires beneficiaries of inherited IRAs or 401(k)s to withdraw all assets in that plan within 10 years of the death of the original owner.
Exempt from the new rule are the surviving spouse of the original owner, disabled or chronically ill individuals, minor children and others.
Meanwhile, we’ve gotten several questions from folks calling in to our Consumer Action Center asking if they have a stretch IRA they inherited before Jan. 1, 2020, are they subject to the 10-year rule?
The answer to that specific question is no. They too are exempt. If you inherited an IRA on Dec. 31, 2019 or any date earlier, you should be grandfathered in under the old rules.
Other Miscellaneous Changes From the SECURE Act
There are some more provisions of the SECURE Act that go beyond what’s listed here. Some deal with other aspects of retirement. For example, small businesses will be able to band together beginning in 2021 to get better plan terms for employees.
In addition, employers will be able to auto-enroll employees at 15% of their pay, up from 10%, in the retirement plan at work. Money expert Clark Howard says he loves this idea.
“If I were your emperor, everybody would be required to save 10 to 15 cents of every dollar they make during their working lifetime for retirement. The reality is we as Americans allow our spending to rise to whatever our paychecks are and sometimes more. So, having mandatory enrollment and a big-time percent of pay going into 401(k)s is something that will be part of the environment. As an employee, you can still go to human resources and say ‘no’ and roll it back. But most people once enrolled keep going with it. The idea behind this is that you’ll never be able to live in comfort off of Social Security and many of us won’t be physically able to work the rest of our days, so forcing you to save for retirement is actually a good thing for your long term.”
Meanwhile, other parts of the act go beyond retirement into different parts of life like education and parenthood.
For example, there’s the new rule that any remaining 529 money can be used to pay for up to $10,000 in student loan debt. Another new provision allows parents to take up to $5,000 from retirement accounts penalty-free for a full year after the birth or adoption of a child.
If you want to get a fuller understanding of what’s in the SECURE Act, start with this outline from the House Committee on Ways & Means.
The SECURE Act represents a big change to the retirement landscape. It will affect both those who are still working and those who are drawing down their funds in retirement.
If you need guidance for your retirement future, be sure to check out our story on How to Start Investing and Saving for Retirement.
Finally, if you have additional investing questions, please consider calling our Consumer Action Center.
Contact Clark’s Consumer Action Center — a FREE helpline open Monday-Thursday from 10 a.m. – 7 p.m and Friday from 10 a.m. – 4 p.m. EST. We have volunteers available to answer YOUR concerns! Call Team Clark @ 404-892-8227.