New rules, designed to make it easier for people to save and invest for a long life, could help you boost your retirement-readiness
IF YOU’RE ONE OF THE MILLIONS OF AMERICANS concerned about saving enough for retirement, the sweeping new SECURE Act (“Setting Every Community Up for Retirement Enhancement Act of 2019”) brings several good reasons for cheer.
The act, most of which took effect on January 1, 2020, increases access to IRAs and workplace retirement plan accounts, such as 401(k)s—as well as the potential tax advantages they offer—to more people for a longer period of time. It also offers incentives for business owners to help employees save and invest more and sets a new limit on the length of time certain heirs have to take distributions of your retirement assets. “Taken together, these changes could have a significant impact on the way people plan for retirement,” says Christopher Adam, managing director and head of Personal Retirement Solutions at Bank of America.
The SECURE Act increases access to IRAs and workplace retirement plan accounts, such as 401(k)s—as well as the potential tax advantages they offer—to more people for a longer period of time.
The checklist below highlights 10 of the most notable changes. “Consider what they might mean for you, and then talk them over with your financial advisor,” says Adam.
1. More time to save
Recognizing that more people are living—and working—longer, the act eliminates the age limit that has prevented people from contributing to a traditional IRA after they turn 70½. As of the 2020 tax year, if you have earned income, you may continue to put money in your traditional IRA, regardless of your age. (Note that this change doesn’t apply to tax year 2019 IRA contributions.)
ASK YOUR ADVISOR: Considering my health, life expectancy, investing preferences and desired lifestyle in retirement, how much might I need to save?
2. Staying invested longer
The act also increases the age at which individuals must begin taking required minimum distributions (RMDs) from an IRA or workplace retirement plan account to age 72, from 70½. The change—which applies to anyone reaching 70½ after December 31, 2019—gives you more time to let the investments in a retirement account grow tax-deferred. (Generally, distributions from pre-tax retirement plan or IRA assets are taxed as regular income. If you reached age 70½ on or before December 31, 2019, you’ll be subject to the prior rules and will be required to take an RMD for the 2019 tax year and every year after that. You may be able to delay taking RMDs from your workplace retirement plan if you’re still working as of your required beginning date and you don’t own 5% or more of the company.)
ASK YOUR ADVISOR: What sources of income can I draw on in order to let my retirement savings continue to grow?
3. Giving to charities
For years, taxpayers have been able to satisfy (or reduce) their obligation to take required minimum distributions by giving up to $100,000 directly to charities (called a QCD), starting at age 70½—thus reducing their taxable income. You may still make qualified charitable distributions (QCD) at 70½ even though the age for taking RMDs has increased to 72 (for those who will reach age 70½ after December 31, 2019). But keep in mind that the amount of your qualified charitable distribution will be reduced by the amount of any deductible contributions you make to a traditional IRA for the years in which you were age 70½ or older, effective beginning with the 2020 tax year. Check with your tax advisor to see if it makes sense to take a QCD.
ASK YOUR ADVISOR: What are some tax-efficient ways to give to the causes I care about? And how can I direct distributions to multiple qualified charitable organizations from my IRA?
4. Starting your retirement planning sooner
Say you’re a graduate student getting by on income from a fellowship. Until now, that income didn’t make you eligible to contribute to a traditional IRA. The act expands the definition of compensation to include taxable fellowship and stipend income (not counting tuition scholarships or other amounts that are not considered taxable income). Though dollars may be tight, the change offers an opportunity to develop a savings and investment habit early. Consult a tax advisor to help determine whether your income qualifies you to make retirement contributions.
ASK YOUR ADVISOR: What can I afford to contribute to an IRA, given my current age and situation?
5. Using 529 plan assets to help pay student debt
In the past, using assets in a 529 education savings account to help pay student loans would have been treated as a non-qualified distribution, resulting in taxes on any earnings and a 10% additional federal tax. Now, you can use up to a lifetime limit of $10,000 from a 529 plan to pay student loans for the beneficiary of the plan or a sibling of the beneficiary. The lifetime maximum applies to each of them individually.
ASK YOUR ADVISOR: How can I balance my debts with the need to save for retirement or other long-term goals?
6. More education expenses covered
In another key 529 plan development, students who enroll in registered and certified apprenticeship programs—previously not considered qualified higher education expenses under 529 rules—may now use 529 plan distributions to cover qualified expenses such as books, supplies and equipment. Expanding the list of qualified education expenses for their children could help to preserve parents’ ability to save and invest for their own retirement.
ASK YOUR ADVISOR: Could establishing a 529 plan for my children help me save and invest more for retirement?
7. A new early-withdrawal opportunity
If your family is expanding, the act enables you to withdraw up to $5,000 from your workplace retirement plan account or IRA during the first year after birth or adoption without paying the 10% additional federal tax for early withdrawals (before age 59½). Keep in mind that the withdrawal will be subject to regular income tax and that withdrawals could slow your savings and investment momentum.
ASK YOUR ADVISOR: What are the pros and cons of using retirement assets to meet current expenses?
8. Incentives for small business owners
A newly expanded tax credit of up to $5,000 is aimed at small business owners who want to help their employees prepare for retirement, but who may have hesitated due to the perceived expense. The credit (previously capped at $500 annually for three years) kicks in when you establish a workplace retirement plan, and there’s an additional new $500 annual credit for up to 3 years if the plan includes automatic enrollment (even if the feature was added after the plan was adopted). The act also includes provisions intended to make it easier, from an administrative standpoint, for small businesses to offer 401(k) plans to their employees.
ASK YOUR ADVISOR: How can I help my employees save for the future, without compromising my business and personal goals?
9. A boost for employee savings
If your employer offers automatic enrollment with an escalation feature under its retirement plan, the amount withheld from your earnings could increase every subsequent year after the first year that you’re enrolled in the plan until you reach 15% of your eligible compensation, compared with a maximum of 10% under the old rules. (During the first year of enrollment, the 10% limit will continue to apply.) Making annual savings and investment increases automatic could help you reach your retirement goal faster.
ASK YOUR ADVISOR: How can I budget to be able to afford to save and invest more for retirement?
10. New rules for your heirs
Beneficiaries who inherit IRAs or other qualified retirement plan assets may no longer stretch their required minimum distributions over the course of their expected lifetime unless an exception applies.1 Under the act, certain of your beneficiaries must withdraw the entire account balance—and pay income tax on those withdrawals—within 10 years.
ASK YOUR ADVISOR: Given the new rules, what are my options for leaving as much as possible to my loved ones?
“Overall, the SECURE Act contains 30 sections,” Adam notes. “Given its complexity and the opportunities it may provide to help you boost your financial security in retirement, it’s worth checking in with your advisor about what it might mean for you.” You should also speak with your attorney or CPA about the tax implications, he notes.
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1 Distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death. (Entity beneficiaries would not be impacted by this 10-year rule and would still follow the 5-year rule that was in effect prior to new legislation.) This applies to distributions where the decedent passed away after 12/31/2019. If the decedent passed away on or prior to 12/31/2019, you may be able to stretch the account over your life expectancy, but your beneficiary who inherits the account if you die would be subject to the 10-year rule. Check with a tax advisor regarding your specific situation.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.