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The SECURE Act Is Changing Retirement For Many–What You Need To Know

Kelli ClickContributor InvestingI write about IRAs, alternative investments and retirement planning.

Late last year, new legislation was signed into law that will usher in some of the most sweeping changes to retirement plans in decades. The Setting Every Community Up for Retirement (or SECURE) Act was originally passed by the House of Representatives last spring. It failed to pass the Senate then, but the legislation was included in the year-end spending bill that was passed on December 20, 2019.

The SECURE Act became effective on January 1, 2020, and it will inevitably affect many retirement savers, for better or worse. Here are a few of the most significant provisions that you should be aware of:

Elimination of the “stretch IRA”—Stretch IRA is a term that was used to describe a technique in which a beneficiary would extend distributions from an inherited IRA over his or her lifetime. This could enable young beneficiaries to extend the payout period from an inherited IRA over decades, spreading out the payment of income taxes over a long period of time.Today In: Money

The SECURE Act effectively eliminated stretch IRAs as an estate planning tool. Effective for deaths occurring after December 31, 2019, funds from inherited IRAs must now be fully withdrawn by beneficiaries within 10 years of the account owner’s death. The old rules still apply for deaths that occurred before this year for the original beneficiary, but once he or she dies, the new rules will apply to successor beneficiaries.

The Act includes exemptions for certain kinds of beneficiaries, including surviving spouses, minor children, the chronically ill and disabled, and beneficiaries who are not more than 10 years younger than the account owner. Note that grandchildren are not included among these exemptions.

Elimination of age limit for making Traditional IRA contributions—Previously, individuals were not allowed to continue making contributions to Traditional IRAs once they reached age 70½. But the SECURE Act removes this age limit, effective this year. This could be beneficial for the growing number of people who are working past age 70 since they can now continue making IRA contributions indefinitely, thus enhancing their long-term retirement financial security.

Raising of the age for RMDs—Distributions must begin from traditional IRAs when savers reach a certain age. The SECURE Act raised the age for these required minimum distributions (or RMDs) from 70½ to 72. This will enable individuals between these ages to keep money in their IRAs longer and put off paying income taxes on withdrawals if they don’t need funds yet to pay for living expenses.

However, the new rule does not apply to those already older than 70 ½ or turned 70 ½ in 2019 (born on or before June 30, 1949). Those individuals must continue or begin taking RMDs under the old rule.

Expanded plan eligibility for part-time workers—Also starting next year, part-timers who have worked more than 500 hours a year for three consecutive years must be allowed to participate in their employer’s 401(k). Part-timers who worked 1,000 hours or more during the past year also must be granted access to the plan.

New employer protections for offering annuities—Due to liability concerns, many employers have been hesitant to offer annuity contracts as an investment option for plan participants. The SECURE Act provides a safe harbor for plan sponsors that will protect them from liability when selecting an insurer. As a result, more businesses may start offering these popular options in their investment menu.

Lower barriers for offering multiple employer plan, or MEPs—Many small businesses that would like to offer a retirement plan are discouraged by excessive compliance burdens and high administrative costs. One simpler and more cost-effective solution is a multiple employer plan in which small firms join together to offer a plan, sharing a plan administrator and lowering costs and administrative duties.

However, a rule requiring that businesses joining together to form a MEP have a common connection or similarity — such as being in the same industry — has made the formation of MEPs more difficult. Starting next year, these rules will be relaxed so that it’s easier for unrelated businesses to form a MEP. This could increase access to a retirement plan for employees who work at small firms.

The SECURE Act could have wide-ranging effects on the retirement planning landscape in the United States.