Securing Your Retirement

By McKay Lindsey, mckayl@squire.com

As much as you love your job, you’re probably not going to want to work for the rest of your life. With the number of years the average American spends in retirement at an all-time high, in addition to figuring out how to fill your time, you need to consider how you’re going to fund your retirement. Congress recently passed the Setting Every Community Up for Retirement Act (SECURE Act), effective January 1, 2020, which made significant changes to help you “secure” your retirement.

Key Changes

• Easier and less expensive for small businesses to set up safe harbor 401(k) plans
• Allows more part-time workers to participate in 401(k) plans
• 401(k) plans can offer annuities
• Required Minimum Distributions (RMDs) moved back from 70 ½ to 72
• Removed age limit on IRA contributions
• 10-year distribution schedule for non-spouse inherited IRAs
• Penalty-free IRA and 401(k) withdrawals after the birth or adoption of a child
• 529 account funds can be used to repay up to $10,000 of qualified student loan debt

401(k) Plan Changes

Under the SECURE Act, small businesses can receive a tax credit for starting a new retirement plan. The tax credit is the greater of $500 or $250 multiplied by the number of non-highly compensated employees up to $5,000. There is also a $500 tax credit for starting a new SIMPLE IRA or a 401(k) plan with automatic enrollment. These tax credits are available for up to three years.

Small businesses also have the option to save costs by joining with other businesses in a Multiple Employer Plan (MEP), which was previously only an option for related businesses. The failure of one business in the MEP will no longer disqualify the other businesses in the MEP under the SECURE Act.

Although 401(k)s and IRAs are meant to be used for retirement, the SECURE Act has made it easier for growing families to access their retirement monies to ease the financial pressures after the birth or adoption of a child. Up to $5,000 per individual may be withdrawn penalty-free from an eligible retirement plan (401(k), IRA, 403(b) or 457(b)) within one year following the birth or adoption of a child.

The eligibility barriers to participating in a 401(k) plan have been lowered to allow more part-time workers to participate. Employees age 21 and older who work 500 or more hours for three consecutive years will now be eligible to participate in their employer’s 401(k) plan. The prior eligibility requirement was one year of service and 1,000 hours. While these part-time employees may be eligible to participate, employer matching contributions will not be required for these participants.

IRA Changes

For individuals reaching age 70 ½ after December 31, 2019, Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs are not required until age 72. Participants of qualified plans may further delay RMDs from their current employer’s plan if they continue working past age 72. Prior to the SECURE Act, Required Minimum Distributions (RMDs) from a traditional IRA were required when an individual reached age 70 ½.

With the removal of the age limit on IRAs, individuals with earned income may continue to contribute to an IRA as long as they live, however, RMDs from IRAs are still required after age 72.

Non-spouse beneficiaries of inherited IRAs are required to take RMDs over a 10-year period under the SECURE Act, rather than allowing beneficiaries to stretch RMDs over their lifetime. There are exceptions to the 10-year distribution schedule for certain eligible beneficiaries including: spouses, minor children, disabled individuals, chronically ill individuals, individuals within 10 years of the age of the IRA owner.

529 Education Savings Account Changes

Under the SECURE Act, an owner of a 529 plan may make a tax-free distribution of up to $10,000 to the account beneficiary to repay qualified student loan debt. It’s important to note that these distributions are allowed under federal law, but many states view these distributions as a non-qualified withdrawal.

While COVID-19 related issues have taken center stage for the past few months, don’t forget about these important changes the SECURE Act has made to help you “secure” your retirement. If you have any questions about how the SECURE Act affects you, contact a Squire professional for help.