Secure Act
Your guide to new regulations.
The SECURE Act: what changed and what you need to know.
The SECURE Act changed a number of rules related to tax-advantaged retirement accounts. One of those changes is that the stretch IRA is gone. Now, the law requires a full payout from an inherited IRA within 10 years of the death of the original account holder, unless it’s your spouse. This change will raise somewhere around $15 billion in tax revenue for the government while affecting saving strategies. People whose plan is to leave their children the money they saved in a tax-advantaged IRA will need a new strategy.
Retirement Changes
One major change is the introduction of Pooled Employer Plans (PEPs), a multiple-employer plan that allows employers to join together to create a single retirement plan.
Currently, employers may form Multiple Employer Plans (MEPs), which require the employers to share a common economic or representational interest. PEPs, however, do not have this requirement, and therefore diverse employers can create a single retirement plan, effective January 1, 2021.
The SECURE Act also did away with the “one bad apple rule.” Under this rule, an MEP could be disqualified if any employer in the MEP was not compliant.
All employees—except those in a collectively bargained plan—who have worked 500 hours a year for three consecutive years are now allowed to participate in the employer’s retirement plan. Employers, however, are not required to make contributions to these employees’ retirement plans.
Secure Act and the employee
Additionally, the SECURE Act increases tax credits for small employers for starting a retirement plan from $500 per year for three years to $5,000 per year for three years, plus an additional tax credit of $500 per year for three years for employers that start a retirement plan with automatic enrollment.
This reduces the number of hours required to work; this way, part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service are more incentivized to enroll.
Contributions
Under the old rules, you had to be under age 70½ in order to contribute to a traditional IRA. Under the SECURE Act, however, anyone of any age can make a traditional IRA contribution. Before the SECURE Act, if you were 85 years old and still working, you wouldn’t have been able to contribute to a traditional IRA.
Now, you’ll still be able to contribute, no matter what your age: workers over age 70½ can make traditional IRA contributions, which also potentially allows them to make backdoor Roth IRA contributions.
Kids and College
Withdrawals Regarding Children
Under the new act, new parents can withdraw up to $5,000 from 401(k) accounts to defray the costs of having or adopting a child, penalty-free.
College
529 accounts, which could be used to repay student loans under the bill, can be used by parents who may have funds remaining in an educational savings account and want to help a child who has already graduated.
The SECURE Act also allows individuals to withdraw up to $10,000 during their lifetime from their 529 plans, tax-free, in order to pay off their student loan debt. Originally, 529 plans were strictly for post-secondary education expenses, however, that has been expanded to include K-12 expenses.
Under the SECURE Act, 529 funds can be used to pay off college debt. That said, not all states may allow the student loan benefit to come out tax-free at the state level.
How much time should it take to offer a 401(k) to my employees?
