The nature of work is constantly evolving. Globalization has made freelancing or taking contractual jobs more widespread. Add to that the more significant number of people who want to continue working after the retirement age. This, and many other factors, has paved the way for an upgrade in the US’s retirement system.
You may have heard about the SECURE Act but unsure about what it is and how it affects you. This legislation should interest individuals and employers as it can impact both financial planning and retirement.
What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement or SECURE for short, is a bipartisan legislation that helps Americans save for their retirement. It was signed into law on December 20, 2019, and has taken effect on January 1, 2020.
The act is now the most extensive reform to impact the economy since the Pension Protection Act of 2006. It aims to improve the private employer-based retirement system’s success by making it easier for companies to provide retirement plans. It also allows for retirement savings to be more accessible to individuals, especially the less-advantaged.
A Few Key Takeaways
- The act cancels the maximum age for traditional IRA contributions, which is currently at age 70½.
- It allows long-term, part-time workers to take part in 401(k) plans.
- It enables broader options for lifetime income strategies.
- The required minimum distribution (RMD) age for retirement accounts is increased to 72 from the previous 70½.
- It lets parents withdraw up to $5,000 from retirement accounts with no penalties within one year of birth or adoption for qualified expenses.
- It permits parents to withdraw up to $10,000 from 529 plans to pay back student loans.
- It offers relaxed rulings on employers offering annuities through sponsored retirement plans
- It has revised the Tax Cuts and Jobs Act components that raised taxes on benefits received by family members of deceased veterans, students, and some Native Americans.
What is the SECURE ACT’s Impact on IRAs?
As more Americans work past beyond the traditional retirement age, the SECURE Act affects the IRA in more ways than one.
Owners of traditional IRAs (individual retirement account), SEP IRA (simplified employee pension), or SIMPLE IRA (savings incentive match plan for employees individual retirement) are required to make required minimum distributions (RMD). They are expected to do so on their required beginning date (RBD) and continue for every year after that.
With the SECURE Act, 72 is the new 70½. This is the new RMD start date. This means that before the implementation of the act, you need to start taking withdrawals from a traditional IRA by April 1 of the year after you turned age 70½.
You are no longer required to withdraw assets from IRAs and 401(k)s at age 70½. It allows IRA owners to defer paying taxes on those funds while they are growing. Those who turned 70½ in 2019 need to take RMDs for 2019 and 2020 even though they don’t turn 72 until 2021.
Previously, IRA owners can contribute until they reach 70½. The new bill has removed that age limit and lets you contribute to your IRA as long as you’re still working.
For workers aged 71 or older in 2020, they can contribute up to $7,000 to an IRA in your name and your spouse’s name for a total of $14,000. This saw an increase from the previous contribution limit of $6,000 or $7,000 if you are 50 or older. This also translates to a valuable tax deduction to help you save more for retirement.
As for those who inherited IRAs whose owners passed away after Jan. 1, 2020, they are required to withdraw assets in an inherited IRA or 401(k) within ten years. They could no longer stretch out the withdrawals over their life expectancy.
The law requires them to make tax payments on each distribution. However, there are a variety of exceptions to this new rule. Experts recommend revisiting your situation under the SECURE Act for IRA stretching concerns.
Student Loans and the SECURE Act
The SECURE Act has made a necessary change in how 529 college savings funds can be used. A 529 is a tax-advantaged savings plan created to help pay for education costs. The SECURE Act has given parents and grandparents the ability to use the 529 distributions to repay student loans. This proves timely as this is a benefit that’s one of the most frequently sought.
Another improvement the SECURE Act offers is that under the new bill, 529 distributions can now be used for other expenses. These include textbooks, fees, and tools that are related to apprenticeship programs. These changes allow for college savings that are more beneficial for families.
2 Unique Ways to Invest in Your Retirement
Since the new rules allow you to better save and invest for a long life, you can improve your retirement readiness with a plethora of plans and strategies. If you’ve already prepared for them, here are two unique ways to invest in retirement that you can try:
Use Your Home to Generate Income
A smaller home can have lower maintenance costs than a large one. So, if you live in a big house, consider moving to a more compact one. Relocating to a place where the cost of living is lower also helps fund those retirement savings.
You may also consider getting into a reverse mortgage program. This can provide you with tax-free income from a lender who uses the equity in your home.
Start a Small Business
The SECURE Act’s newly expanded tax credit of up to $5,000 is ideal for small business owners. You may want to start one to add to your income as well as boost your retirement savings.
Small business owners can help their employees get ready for retirement. This wasn’t something that they thought of before the SECURE Act because of the misconception that this is expensive. When you establish a workplace retirement plan, you benefit from the tax credit.
