Are you afraid of outliving your money in retirement? If you said yes, you’re not alone. Running out of money is the number-one fear people have as they transition into retirement. (1) With life expectancy on the rise, policymakers and employers understand they need to start helping retirees manage their money.
Back in May 2019, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was passed with bipartisan support by a count of 417-3. On December 20, 2019, President Trump signed the bill into law, making it easier for retirees to have a reliable stream of income that lasts through retirement—exciting news for the many Americans who are concerned about stretching their retirement dollars.
While the SECURE Act bill proposes over 20 changes, here’s a quick summary of the key takeaways of the SECURE Act and what it means for you and your money.
1. More Annuity Options
Annuities are a type of insurance that guarantees a monthly income in retirement. They’re usually part of pension plans. Annuities aren’t popular 401(k) options because employers can be sued if the insurance company goes out of business or fails to pay a claim.
Under the SECURE Act bill, the liability would be removed from the employer. This means more employers could offer annuities to their employees without having to worry about being held liable for unpaid claims. The benefit to you is that you get more options to diversify your retirement income through different types of investments.
2. No IRA Age Limit
Under the current law, you can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (2) Under the SECURE Act, this age cap would be removed.
3. Required Minimum Distribution (RMD) Age Raised To 72
Currently, people who have money in 401(k)s or other tax-deferred plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (3)
If you turn 70½ in 2020 or later, under the SECURE Act bill, the new mandatory withdrawal age would be 72. This is helpful for those who are still working or are trying to stretch out their savings for a longer retirement. Please note that if you turn 70½ in 2019 or earlier, you are still required to take your RMDs as previously required.
4. New Additional Plan Features
The new law would require employers to list a participant’s projected monthly retirement income on their 401(k) statements. This projected monthly income would be based on their current account balance and would give plan participants time to adjust their savings rate and better prepare for retirement.
The bill would also allow new parents to make a penalty-free withdrawal of up to $5,000 from their retirement account within the first year of their child’s birth or adoption. This money could then be used to cover child-related expenses.
Under the SECURE Act, long-term part-time workers would be able to finally take part in 401(k) plans. This is great news for women who disproportionately take on part-time work to care for children and aging parents.
5. Lifetime-Income Provision
There’s plenty of advice on how to accumulate wealth using various retirement plan accounts, but no one really talks about how to manage your wealth once you retire. The new lifetime-income provision, coupled with annuities, is designed to help ensure retirees don’t outlive their money.
6. Changes To Inherited Retirement Accounts
Under the current law, inherited retirement account distributions can be spread out over the recipient’s lifetime. Under the SECURE Act, a recipient would be required to withdraw the money—and pay taxes on it—within a 10-year period.
This doesn’t affect those who inherit smaller accounts. But for those who inherit larger accounts, taxes will have to be paid over a shorter amount of time, which means a higher tax bill. And for those who inherit an account in their prime earning years, their tax burden will increase even more, decreasing the value of the account. Surviving spouses and minor children are exempt from this rule.
7. Small Business Tax Relief For Offering Retirement Plans
The start-up costs for retirement plans can be costly—especially if you’re a small business owner. Thanks to the SECURE Act, the small business tax credit is increased from $500 a year to up to $5,000 a year for three years. This change is put in place to encourage more small business owners to offer workplace retirement plans for employees. Employers will get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with “auto-enrollment,” on top of the start-up credit they already receive.
8. Part-Time Workers Now Have Access To A 401(k)
Part-time workers are eligible for a 401(k) as long as they:
- Have worked at least 500 hours a year (or 9.6 hours a week) for at least three years
- Are at least 21 years old by the end of the three-year period
Your First Step
If you’re concerned about how the SECURE Act will affect your path to retirement, we’re here to help. At 1on1financial, we help you make what you’ve saved last the rest of your life so you can live out your retirement the way you want, and pass on your money to your family without worry. If you have questions about the SECURE Act and what you should do in response to the changes, call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses throughout the United States. He is also the owner and CEO of Medi-cal Benefits.