Back in December of 2019, the SECURE Act was signed into law. While some of the key changes are outlined below, the provisions of this legislation will be subject to the review and interpretation of the Internal Revenue Service.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a retirement bill that came into effect on January 1, 2020. Open MEPs (Multiple Employer Plans) are effective on January 1, 2021. In this article, we will discuss some of the ways this act can affect retirement planning including the ability to save money as well as access to retirement funds over time.
Also referred to as MRDs, required minimum distributions from 401(k) plans and traditional IRAs refers to the process of taking periodic withdrawals from these accounts beginning at a certain age. Requiring a minimum distribution allows the federal government to collect income taxes on the money held in these accounts.
Recognizing that Americans are living longer, account holders that reach the age of 70 1/2 after January 1, 2020 will not have to begin taking their RMDs until age 72. Individuals that reach age 70 1/2 prior to January 1, 2020 must continue to take their RMD in 2020. Overall, this change is good news for retirees since it allows them to defer taking a withdrawal from these accounts if the income isn't needed.
Prior to this act, individuals age 70 1/2 or older could not contribute to a traditional IRA. The SECURE Act removes this restriction and now allows individuals to contribute to a traditional IRA regardless of age. Keep in mind that an individual must still have earned income to contribute to an IRA and the contribution limits remain the same under this law.
Individuals may now take a "qualified birth or adoption distribution" from their retirement account upon the birth or adoption of a child. This distribution, up to $5,000 from any defined contribution plan such as a 401(k), 403(b) or an IRA, is not subject to the 10% early withdrawal penalty. Married individuals can withdraw up to $5,000 from each of their accounts. While the law removes the 10% early withdrawal penalty, unless the funds are repaid, income taxes are due on the distribution. Individuals have one year from the date the child is born or adopted to make this withdrawal penalty-free.
The SECURE Act expands the definition of a qualified (tax-free) withdrawal from a 529 to include repayment of up to $10,000 in qualified student loans. Qualified withdrawals also include certain expenses for apprenticeship programs. This change is retroactive to distributions taken after December 31, 2018.
In 2021, part-time employees that have worked at least 500 hours per year for three consecutive years are now eligible to participate in their employer's 401(k) plan. Previously, an employee must have worked 1,000 hours per year to participate. Part time employees must also be age 21 at the end of the three-year period. Unfortunately, this provision does not apply to employees covered by a collective bargaining unit agreement.
While it's never a good idea to borrow from a retirement account, plans typically allow loans under repayment agreements. Generally, the terms of these loans include repayment in five year or less. Unfortunately, some 401(k) administered debit and credit cards, which made borrowing too easy. The SECURE Act put an end to this arrangement and obtaining a 401(k) loan through a debit or credit card is no longer permitted.
It's easy enough to determine how much money is in a 401(k) account; however, it's far more difficult to know how much income it will provide once retired. Starting in 2021, the SECURE Act requires 401(k) plan administrators to provide lifetime income disclosure statements annually. The statements will provide plan participants with an estimate of the monthly income stream provided by an annuity.
The new law also provides 401 (k) plan sponsors with an easier path to providing annuities and other types of lifetime income options. It does this by removing some of the legal risks associated with these offerings. Finally, annuities are now portable, meaning that a 401(k) annuity can now be rolled over to another plan if someone switches employers.
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