The “Setting Every Community Up for Retirement Enhancement” Act, or SECURE Act, was signed into law by President Trump earlier this year. Not only has it made a few meaningful tweaks to the retirement vehicles used by millions of Americans, but small business owners can also open retirement options to their part-time workers more easily. Read on to learn what the SECURE act is and how it might impact your retirement.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Changes to 401(k) Plans
The 401(k) plan is the primary retirement savings option for many Americans working for small and mid-size businesses. These accounts offer tax advantages for savings and investments, but they come with several age-based restrictions attached—namely when you can tap the account and when you must tap the account.
For 401(k) savers, the minimum age for taking distributions is still 59 ½, meaning no money can be withdrawn until six months after your 59th birthday without incurring penalties. However, the mandatory distribution age, or the age when you MUST begin taking distributions, has been pushed back from age 70 ½ to age 72. If you have retirement savings in a 401(k) account, you can continue contributing and allow your funds to grow untouched until your 72nd birthday.
Here are a few other notable changes to 401(k) plans:
- Annuities are now available to be sold in 401(k) plans should your employer choose to offer them. Previously, 401(k) accounts had been restricted to mutual funds. Annuities can be transferred from one 401(k) plan to another without getting hit with surrender fees.
- If you’re a parent with a new child at home, you can tap your 401(k) account for $5,000 without incurring the early withdrawal penalty (of course, taxes must still be paid). If you withdraw $5,000 under this method, you can replenish your account later without it counting toward the annual limit.
- Part-time workers who have long-term jobs at their companies are now eligible for inclusion in 401(k) plans. Any worker who logs 500 hours in a 12-month term for three straight years can contribute to a 401(k) provided they are at least 21 years of age.
Changes to Individual Retirement Accounts (IRAs)
Traditional and Roth IRAs are self-directed retirement savings vehicles that can be opened by anyone whose annual income doesn’t exceed certain limits. Like 401(k) accounts, IRAs have had their mandatory distribution age pushed back from 70 ½ to 72.
Another change to IRA accounts involves accounts left to beneficiaries following the death of the previous holder. If you inherit an IRA account, you used to be able to take distributions from it over the course of your project lifespan. But under the SECURE Act, the time period for distributions has been reduced to 10 years. Thankfully, a number of exceptions have been attached to this rule: surviving spouses, sick or disabled beneficiaries, minor children, and anyone who’s more than 10 years younger than the original IRA account holder.
Changes for Business Owners
Retirement account holders aren’t the only ones benefiting from the provisions outlined in the SECURE Act. Business owners looking to reign in the costs of sponsoring-defined benefit plans can now access an additional $500 tax credit annually for setting up a 401(k) or SEP IRA plan with automatic enrollment. This is on top of the previous tax credit, which can range from $500 to $5000.
Additionally, business owners can combine retirement plans into something called a Multiple Employer Plan (MEP). Previously only available in specific circumstances, MEPs allow businesses to slash the costs involved with opening and managing a retirement plan by combining administrative duties across companies. Business owners joining these MEPs are shielded from liability if another participant commits fraud or some other violation. Business owners who offered annuities in their 401(k) are also shielded from liability should the annuity provider go bankrupt.
Changes to 529 Plans
Not much is different here, but 529 plan holders will now be able to withdraw up to $10,000 to pay off both student loans and apprenticeship programs.
What Does This Change for Your Retirement?
For most savers, these new provisions don’t change much. If you’re investing in mutual funds through a 401(k) and still have years to go before retirement, there’s nothing here that really affects you. New parents can take advantage of the relaxed restrictions on tapping their retirement accounts and older savers can wait until their 72nd birthday to start taking distributions. And now that annuities are available in 401(k) plans, conservative savers can reduce market risk and add guaranteed lifetime income to their retirement vehicles.
Work With an Experienced Financial Advisor
Now that you know what the SECURE act is and how it might impact your retirement, if you have any questions, consult with a team member from Good Life Financial Advisors of Mount Pleasant today.