In December 2019, Congress approved a spending bill that included the SECURE Act – a measure aimed at providing Americans with extra incentives to save or prepare for retirement. These changes largely become effective in 2020.
The SECURE Act will impact American investors in the following ways:
- Penalty-Free Withdrawals for Birth or Adoption of Child. The new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. If you're married, each spouse can withdraw $5,000 from his or her own account, penalty-free.
- You would still owe income tax on the distribution, unless you recontribute the funds to the retirement account at a later date. If you recontribute the funds withdrawn for birth/adoption, the amount recontributed would be considered a non-taxable rollover.
- You have one year from the date your child is born or adopted to withdraw the funds from your retirement account without paying the 10% penalty.
- These provisions are not allowed for adopting your spouse’s children.
Part-time workers have greater access to 401(k) plans. Currently, part-time workers must work 1,000 hours during the year to participate in their employer’s 401(k) plan. Beginning in 2021, the new law guarantees 401(k) plan eligibility for employees (age 21 or older) who have worked at least 500 hours per year for at least three consecutive years.
- No Age Restrictions on IRA Contributions. You can now contribute to a Traditional IRA if you continue working into your 70s and beyond.
- Small businesses can participate in multiemployer 401(k) plans and receive tax credits for implementing automatic enrollment in the retirement plan. This means that more new employees will be automatically enrolled in retirement plans since they would need to opt out rather than opt-to the plan.
- Inherited IRA distributions generally must now be taken within 10 years.
- Previously, if you inherited an IRA or 401(k), you could "stretch" your distributions and tax payments out over your single life expectancy. Many people have used "stretch" IRAs and 401(k)s as reliable income sources.
- Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.
- Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
- Increased access to annuities within employer-provided retirement accounts. The SECURE Act loosens rules regarding access to annuities in retirement accounts. Currently only 10% of retirement plans offer annuities, but this number is likely to increase. While this may be good news to some investors, annuities have gotten a bad reputation among many investors, due to their high costs, complexity, and the loss of the asset after it is annuitized.
John Miller, CFP® of Longview Advisors provides comprehensive wealth management and financial planning services on a purely fee-only (fiduciary) basis. The company has offices in Wichita and Newton and serves clients throughout Kansas and the United States. Prospective clients can hire the company for wealth management services on an annual retainer, which includes ongoing investment management and financial planning. This includes tax and estate planning, portfolio analysis, retirement planning, and additional planning as needed. The firm also offers hourly financial planning.