A new bill has been passed in the Senate that may affect your retirement planning. Because of people now living longer, the plan – called The SECURE Act – will delay the required minimum distributions (RMD) and allow for a longer savings period. Other changes, five of them, are going to affect your retirement account as well. The word SECURE is an acronym that stands for Setting Every Community Up for Retirement Enhancement.
The bill was attached to another bill that needed to be passed. The SECURE Act bill had been delayed for years even though it was supported by both parties. Knowing the budget appropriations bill had to be passed on Friday, it was attached to the budget bill that would prevent another government shutdown.
After January 1, 2020, you will no longer be required to start getting distributions from your 401(k) when you reach 70 1/2. You will now be able to wait until you are 72, which will give your retirement account more time to build an even larger sum. People who have already reached 70 1/2 and have started getting distributions should continue getting them because it only affects people who have not yet started getting payments.
The new law will enable money to continue to be contributed to your traditional IRA account after you turn 70 1/2. The one stipulation is that you must continue to have an earned income.
Another new feature that the bill will provide for is the addition of annuities into a 401(k). While an annuity can be a good thing in a retirement plan, many companies never offered them because insurers can develop problems. An annuity can be started by making payments or with a lump sum. You choose when you want the payments to start and how long you want the payments to continue. They can go for ten years or a lifetime.
The SECURE Act is likely to cause an increase in the number of 401(k) plans offering annuities because it provides legal protection for employers. It is likely to take some time to be offered widespread, but you will want to look for it in the near future.
Other Uses of Retirement Funds
Some of your retirement account money in a 401(k) may now be used for other purposes. If the money is needed for the birth of a child or for adoption, up to $5,000 can now be used without a penalty for those purposes. If married, both spouses will be able to withdraw $5,000 from their accounts. Although the money is penalty-free, it is not tax-free – unless it is repaid. The money must be withdrawn within one year after the child’s birth.
Students may also take some of the money from a 529 plan. Up to $10,000 can be used to pay off student debt.
More affluent people will now be able to save more money with an IRA. The tax advantages will now be able to be spread across other generations.
Part-Timers and 401(k)s
People who work part-time will also be able to get 401(k)s but not until 2021. Up until now, part-timers had to work at least 1,000 hours during the year before being eligible. The new law changes the requirement down to 500 hours per year, but they must have reached this number for three consecutive years.
The SECURE Act provides for many changes that have been needed for a long time. The one thing it does not do, however, is that it does not shore up Social Security, which is still expected to reduce payments by 20 percent as of 2035.