Have You Heard of the SECURE Act? How It Impacts Your Retirement
The SECURE Act was signed in December of last year, but an astonishing number of Americans are still unaware of this act and how it can impact their retirement planning and accounts. The SECURE Act (which stands for Setting Every Community Up for Retirement Enhancement) enacted some major changes to legislation surrounding how people fund their retirement accounts, and it’s important for everyone—regardless of how soon you plan to retire—to be aware of these changes. If you don’t know what the SECURE Act is, keep reading to learn about some of the major highlights of this piece of legislation and how it can impact you.
All Americans must begin taking required minimum distributions (RMDs) from their retirement accounts beginning at a certain age. Prior to this year, that age was 70 ½ years old. However, the SECURE Act has pushed back the RMDs so that you don’t have to begin taking them until you’re 72 years old. Please note that this only applies to those turning 70 ½ this year or later; this means those who were born on or after July 1, 1949. For those born before this date, the age for RMDs remains at 70 ½.
Of course, if you wish to begin taking distributions before you turn 72, you are still able to do this. You’re simply not required to take them any earlier than this.
Contribute for Longer
The law that required you to take minimum distributions at 70 ½ also prohibited individuals from making any more contributions to your IRA beyond this age. But under the SECURE Act, the age cap on IRA contributions has been entirely eliminated. So, if you continue to have earned income late into your life, you can continue making those contributions, even after you’ve begun to take distributions from the account.
Penalty-Free Withdrawals for New Children
If you’ve ever had a child, you know it’s expensive. Whether you’re adopting or giving birth, adding a child to your family can come with an incredibly high bill. Luckily, the SECURE Act allows individuals to withdraw from retirement plans to help pay for expenses related to childbirth and adoption without paying any penalties. Each individual can withdraw up to $5,000 for these expenses, so if you and your spouse have separate accounts in your own names, you could withdraw as much as $10,000 to help pay for these expenses.
Eliminated Stretching of Inherited IRAs
The previous legislation for retirement accounts had certain loopholes that allowed beneficiaries to extend the required RMDs on inherited accounts throughout their own lifetime. This could potentially allow those inherited funds to continue growing for decades without accruing any tax. While this “stretching” was certainly nice for those inheriting retirement accounts, it wasn’t the intention of the legislation. So, under the SECURE Act, those loopholes have been closed.
Now, non-spouse individuals who inherit an account must receive their distributions within 10 years of inheriting the account. As with most pieces of legislation, there are exceptions to this rule, particularly for spouses, disabled individuals, and a few other types of beneficiaries. Minor children who inherit an account are exempt from this rule until they come of age, at which point they will have 10 years to take their distributions.
If you already inherited a retirement account, the new legislation does not apply, and you can continue stretching the funds if you wish.
Tax Credit for Small Business Retirement Plans
The SECURE Act doesn’t just impact individuals; it also impacts businesses and their employer-sponsored retirement plans. One change that the SECURE Act makes for businesses is implementing a tax credit to help small businesses offer such plans to their employees. An employer-sponsored retirement plan is an excellent benefit that many employees search for when applying for jobs. But they can be expensive to offer, which makes it difficult for small businesses to compete for top talent.
The tax credit given through the SECURE Act will provide $250 for each non-highly compensated employee that is eligible for the retirement plan. The minimum credit is $500, with a cap of $5,000. If you include automatic enrollment in the plan, you can get an extra $500 credit.
Retirement for Part-Time Workers
Another change that impacts businesses also offers retirement plans to individuals who only work part time. In the past, more part-time workers did not qualify for employer-sponsored retirement plans, regardless of how long they worked for the company. Now, employers with a 401(k) plan must offer this benefit to ever employee working more than 1,000 hours a year, or any part-time worker who works over 500 hours for 3 consecutive years.
There are many more changes implemented by the SECURE Act, but these are the changes that will impact the most people and businesses. If you have further questions about how these changes impact your retirement plans, contact us to speak to a financial expert.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174