Congress Just Passed the SECURE Act—Here’s What You Should Know
The government is taking steps to make your retirement more secure. Find out how the new changes might affect you.
Increased life expectancies have pushed the first year of required minimum distributions to age 72.
Traditional IRA contributions can be made regardless of age—even past 70 ½.
The non-spousal inherited IRA distribution period is now limited to 10 years.
On December 19th, 2019, the U.S. Congress passed the SECURE Act, which stands for Setting Every Community Up For Retirement Enhancement.
The SECURE Act aims to help Americans prepare for retirement in a number of ways. Below, our in-house experts Eric Bronnenkant, Head of Tax, and Amy Ouellette, Director of Retirement Services, highlight the key changes that are most likely to affect you.
Individual Retirement Accounts (IRAs)
Saving past the age of 70 ½
Previously, Traditional IRA contributions could be made only up until the year you reach age 70 ½. Now, Traditional IRA contributions are no longer restricted by age.
Eric’s take: Amy and I are very enthusiastic about the opportunity for experienced workers to continue to be able to make Backdoor Roth IRA contributions, as long as they (or their spouse, if filing jointly) have earned income.
Student and home healthcare worker* income
Students with stipends and non-tuition fellowship payments can now recognize that income for the purpose of making IRA contributions. Home healthcare workers can now recognize “difficulty of care” payments for retirement plan purposes.
Eric’s take: Amy tells me the greatest friend to an investor is time, which allows for the maximum opportunity to compound returns. Newly eligible students can now choose to save towards retirement in a Traditional or Roth IRA.
Take your RMDs later*
Taking required minimum distributions from Traditional IRAs and 401(k)s can now be delayed until you reach age 72.
Eric’s take: Amy and I frequently discuss the benefits of donating to charity. A special benefit for IRA owners age 70.5 or older is that they have the option of donating up to $100,000 from their IRA directly to charity, tax-free every year.
Penalty-free birth and adoption expenses*
While it’s important to focus on letting your retirement savings grow for your future needs, up to $5,000 can now be withdrawn from retirement accounts to cover expenses related to a birth or adoption. The distribution avoids the usual 10% early withdrawal penalty. Note that income taxes still apply.
Eric’s take: Amy and I know that new parents need all the help they can get. This new opportunity for penalty-free withdrawals provides relief at the most challenging of times.
Non-spousal beneficiary account drawdown accelerated*
IRA benefits that are passed down when an account holder passes away must be fully distributed within ten years if the beneficiary(ies) is not the spouse of the decedent. This might change how you plan to pass on accumulated accounts, or could influence how you need to handle accounts that are passed down to you.
Eric’s take: Inherited IRA rules have been quite complex and this change helps simplify beneficiary choices. There is good news for existing Inherited IRA owners. As of Dec. 31, 2019, they are able to keep their lifetime distribution option.
*These changes apply to 401(k) and other qualified retirement accounts as well.
401(k)s and Other Retirement Accounts
In addition to the applicable changes listed above, the following updates are also coming to your workplace retirement plans.
Access for long-term part-time employees
401(k) plans can currently limit access for employees who work under 1,000 hours per year, which averages out to about 20 hours per week. Beginning in 2021, plans must provide access for employees who haven’t met 1,000 in one year, but have worked for over 500 hours for an employer for at least three years. This aims to increase access to workplace plans when you need to work fewer hours (e.g., based on the type of work, to care for family, etc.).
Eric’s take: As the Director of Retirement Services at Betterment, Amy has been a strong proponent of enhancing retirement security for all workers. Allowing long-term part-time employees the ability to participate in a 401(k) is something we can agree provides them with a better opportunity to meet their retirement needs.
Projecting future benefits
Rather than just reporting a lump sum of what you’ve saved, retirement plans will be required to project out your expected income at retirement.
Eric’s take: This type of projection is something that Betterment already offers to customers who have an IRA account, or a Betterment for Business 401(k) account through their employer.
Other Benefits Impacted
529 College Savings Plans
Savings from 529 plans used to cover certain expenses related to approved apprenticeship programs, as well as up to $10,000 used to cover student loan payments, are now considered qualified expenses. This means these now-qualified expenses can be covered by 529 plan savings without taxes or penalties.
Eric’s take: Paying back student loans can be a burden for many people. This new opportunity to use 529 funds tax-free gives family members (even cousins) a choice to switch the beneficiary tax-free, and facilitate repayment. Amy says that education is the silver bullet and I do not disagree with her on that.
More to Come
The SECURE Act contains 30 sections in all, which you can read about in more detail in Division O of H.R. 1865. Keep an eye out—we’ll share more thoughts on how to make the most of these upcoming changes later on this year.
Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.
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