By Haddon Libby
It may seem hard to believe but Democrats and Republicans passed bi-partisan reforms related to retirement accounts.
Called the Setting Every Community Up for Retirement Enhancement ACT, the SECURE Act was passed and signed into law on December 20th. For the most part, this legislation helps retirees to add more money to their retirement accounts for a longer period of time while delaying the age when you must begin taking distributions.
Let’s go over a few of the key changes due to the SECURE Act:
Saving for Longer: Given that people are living and working longer, Congress changed the laws related to saving for retirement so that you can continue to save as long as you have earned income. In the past, someone who was working and over 70 ½ could no longer save for retirement and had to begin taking distributions from their retirement accounts. Going forward, that age penalty has been eliminated.
Delays RMD: Until this year, people had to begin taking money from their retirement accounts in the year that they reach the age of 70 ½. This mandatory annual withdrawal is referred to as the Required Minimum Distribution or RMD. Given that people are living and working longer, you can delay receiving funds from your retirement account until the 72. If you are already taking a RMD, you cannot suspend withdrawals until you turn 72 as the law only applies to those turning 70 ½ beginning in 2020.
Help for New Parents: Younger savers who add a new child to their home via birth or adoption can now withdraw $5,000 from their retirement accounts without a mandatory 10% penalty for an early withdrawal. Both the mother and father can withdraw $5,000 meaning that a family can take up to $10,000 for each addition to their family. As monies in your retirement account have never been taxed, you will still be taxed on these monies as though it was income.
Education: 529 accounts are used to save for education. The SECURE Act allows for apprenticeship programs. 529 loans can also be used to pay off up to $10,000 of student debt.
Inherited IRAs: One of the few downsides to the SECURE Act applies to those who inherit IRAs. Going forward, inheritors will have to fully liquidate those accounts over ten years. The law does not specify the amount that the inheritor needs to take each year – it simply states that you must take the money within ten years. In the past, the amount distributed each year was set by the IRS based on a person’s age.
Part-timer workers now included: Given the growth in the number of people working more than one part-time job, the law allows part-time employees to participate in employer retirement programs once they reach a minimum number of hours employed. Going forward, once an employee reaches a minimum of 500 hours for three consecutive years or one year with 1,000 hours, they can typically participate.
There are a number of other changes included in the law. For the full extract on the SECURE Act from the House Ways & Means Committee, visit www.WinslowDrake.com and you will find it under the News tab.
If you are an employer with 15 or fewer employees or have no employees, there are some great ways to roll out a plan to your employees or only yourself at some of the lowest costs of any retirement plan. For more information, please call us at 760-449-6349 or email Hlibby@WinslowDrake.com.
As a reminder, the contribution limit for 2020 for a 401k plan is $19,500, a $500 increase from 2019. If you are over 50, your contribution limit increases by $6,500 to $26,000 annually. For those with generous employers, the limit for total employer and employee contributions has increased to $57,000.
Haddon Libby is the Founder and Managing Partner of Winslow Drake Investment Management.