Saving for retirement seems simple enough. We just deposit money into a retirement account, let it accumulate compound interest, and withdraw funds when we turn in our badge, right? Well, there are actually numerous rules surrounding retirement accounts. And now that the Setting Every Community Up for Retirement Enhancement, or SECURE Act, has been signed into law, some of those rules are changing.
Navigating the ins and outs of the SECURE Act can be complicated. However, some of its guidelines could make retirement simpler in the long run. Love it or hate it, the SECURE Act will affect your retirement plan in one way or another.
How Will the SECURE Act Affect Your Retirement?
1. There are incentives to keep saving longer.
The SECURE Act has increased the age at which you must take out required minimum distributions (RMDs). An RMD is the minimum amount the government requires you to withdraw from your traditional IRA each year once you reach a certain age. The age used to be 70 ½, but the SECURE Act has increased it to 72. RMDs are taxed at extraordinary income rates, so this alteration should save retirees some money. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals are remaining the same.
Are you a 70 ½-year-old worker who isn’t ready to retire yet? Good news! You can now contribute to either a Roth or traditional IRA, whereas people over age 70 ½ used to be restricted to contributing to a Roth IRA.
Thanks to the SECURE Act, many part-time employees can enroll in their employer-sponsored retirement plans. If you don’t have the capacity to work full-time, you can still plan for a comfortable future upon retirement.
Finally, graduate and post-doc students can claim stipends and similar forms of income as compensation. This means you can contribute that money to a traditional IRA.
2. You can pay down student debt with a 529 plan.
As student debt increases annually, it only makes sense that the government would give borrowers more options for ways to pay down debt. You and your kiddos can now use 529 college savings plan distributions to pay off up to $10,000 in student loans, per plan beneficiary and their siblings.
For example, if you have one 529 plan account but two children, you can use that account to repay up to $10,000 of each child’s student loans ($20,000 total) out of the single account. Again, check the fine print—there are some details and tax ramifications to be aware of.
529 plans are becoming more and more flexible. You can even use 529 plan distributions for expenses related to a qualified apprenticeship program now.
3. You might restructure your retirement plan.
Employers can auto-enroll you in their retirement plans and automatically increase your contributions after your first year on the job. Before the SECURE Act was signed into law, an employer could increase your contributions to up to 10% of your wages. Now, they can bump your contributions up to 15%.
Don’t want to contribute money to your employer-sponsored plan? That’s fine! As always, you can opt out of the plan or change your contribution amount at any time. However, we usually recommend contributing the maximum amount allowed.
The SECURE Act has also changed the rules surrounding multi-employer plans, or MEPs. Previously, only businesses that shared a common interest could establish an MEP. But the SECURE Act lets unrelated employers set up an MEP under a pooled plan provider, or a fiduciary who oversees the plan.
4. Say goodbye to the non-spouse “stretch” IRA.
We’ve been talking about the perks of the SECURE Act. Now let’s get to something that many people consider annoying: the elimination of the non-spouse stretch IRA.
Have you ever heard of a stretch IRA? To be clear, it isn’t an account type—it’s a practice that permitted the heir who inherits an IRA to “stretch” withdrawals from the IRA over their entire lifetime.
The SECURE Act has ended the stretch IRA for non-spouses. Now most beneficiaries have 10 years to either spend the funds from the IRA or move the money to a different account. This rule could result in heirs paying more in taxes earlier.
Keep the SECURE Act in Mind When Planning for Retirement
We’ve covered the basics of the SECURE Act, but there are a few more odds and ends to keep in mind. For example, parents can now withdraw up to $5,000 from their IRAs without penalty (but with potential income taxes) for birth or adoption events. The SECURE Act also prohibits people from taking out 401(k) plan loans with credit cards.
Are you wondering if it’s time to make some changes to your financial plan? Reach out today to discuss ways the SECURE Act could affect you and your family.