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The SECURE Act: Changes To Your Retirement

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In December 2019, Donald Trump signed the SECURE act. This law will update terms for setting up retirement accounts. Some say this is a great step to improve retirement for Americans when retirement is bleak. Others say this is not a large enough step. Either way, the SECURE act will change retirement.

In this post, I will explain how this law has changed retirement for you.

Better Access To Retirement Accounts For Small Businesses

Probably the most important part of the SECURE act are larger tax credits for setting up retirement accounts for small businesses. Set ups are not cheap, and many small businesses cannot handle the setup. Tax credits will encourage these setups. Tax credits have been increased up to $5,000 for setting up retirement accounts for employees.

Furthermore, automatic enrollment in a retirement plan is a common practice for many businesses. The employee is enrolled in the retirement plan UNLESS they opt out. There are several benefits to setting up retirement plans this way. The act included tax credits for new accounts up to $500 each with automatic enrollment.

I have to say it is about time. One of the largest concerns is that retirement planning rests almost entirely on the employees. By enacting automatic enrollment for employees in small businesses, more employers will feel less burdened. With this act, it also benefits many employers and they will be more likely to enact them.

Access For Part-time Employees

Employers usually left part-time employees out of retirement accounts. This law allows part-time employees to save for retirement. Now, if an employee works over 1,000 hours in a year, or over 500 hours in three years, they must be included in employer retirement plans.

This may sound small, but there were 27.4 million part-time employees in America on December 2019. Furthermore, part-time employees consist mostly of women or family providers. They can rarely work 8 hours a day without needing to take care of a loved one. Some may even work more than one job. Why should these people be denied access to retirement that full-time workers can access? This law allows part-time employees access to retirement accounts.

The SECURE Act Allows Early Withdrawals With New Children

Saving and investing for retirement is one of the best steps you could take. Unfortunately, the money is usually locked. Life happens, people may suddenly need money, especially for a child. With the SECURE act, employees can withdraw money from their retirement for “qualified birth or adoption distributions” without penalty.

Another source claims that you can withdraw up to $5,000 without penalty. However, the IRS will tax it if you do not pay it back. Before you try this, consult an expert.

I have mixed opinions. Retirement accounts usually require time to grow. You should withdraw from your retirement early only as a last resort. This change will take away reservations people should have about early withdrawals. Now for the positive. Complete lock downs of money can keep people from putting money aside for retirement. By adding exceptions employees are more likely to put more money aside for retirement.

Access To Retirement Accounts Access For Graduates And Postdoctoral Students

Many people pull out student loans to go to graduate school. For the rest of us, we have to apply for multiple scholarships (sometimes provided by the school) with the hope we will receive it. If you are to go the graduate school on scholarship like me, you will receive a stipend. Stipend is a fancy term for taxable income that is not treated as compensation. The income is not taken for health insurance costs nor any retirement benefits. With the SECURE act, stipends must be treated as income that can be enrolled in retirement benefits. Now graduate students, and postdoctoral students can access retirement benefits like any other employee.

Required Minimum Distributions

People are living longer lives than they have previously. Therefore, you must do what is in your power to have your account last as long as it can. Required minimum distributions (RMDs) prevent this by forcing retirees to withdraw a minimum amount each year. If you have a 401k or traditional IRA before the SECURE act, these RMDs are applied when you turn 70.5 years of age. Now, the RMDs are only applied when you turn 72. This is not a large extension, but it helps.

No Maximum Age For Contributions

The amount of older workers has increased by a third over the last two decades. Some will labor well beyond the traditional age of retirement. Admittedly, some may never retire fully. Some employees must contribute to their retirement as long as they need to. The SECURE act has removed the contribution age limit of 70.5 years so employees can add to their retirement whenever and for however long they desire.

Annuities Now Available

The SECURE act now allows employers to provide access to annuities. Annuities are options which provide lifetime incomes for retirees. There are pros and cons to these options I will bring up another time.

However, the act has changed how people view retirement. Balances were shown in exclusively in dollar amount. Now, disclosure statements can include how much the retiree CAN live off with their current balance. This will better show employees how much they should save for retirement.

Increase Maximum Automatic Contribution Rates

Typical contributions into employer retirement plans start at 3% and increase to 6% annually. There was a cap at 10% of the employee’s income, but the SECURE act increased it to 15%. This is the least important part of the law. It may increase how much can be contributed, but not how much will be contributed, nor their match. This opens to opportunities though.

The SECURE Act Eliminates Stretch IRAs

With everything the SECURE act provides to benefit workers, that leaves a few questions. One being, what is the catch? This law will eliminate stretch IRAs. Stretch IRAs are IRAs where non-spouse beneficiaries can delay the RMDs of the fund. This can add tax-free growth on a retirement account that is not an individual’s retirement account.

Retirement accounts like IRAs are incredibly powerful tools. They allow money to grow tax-free over decades. If you invest in the S&P 500 with the average annual return rate of 7%, your money should double every decade on average. To put this in perspective, if you invest a hundred dollars at 20 and retire at 70, your money should go through 5 doubling periods. In other words calculate 2 to the 5th power and you will have the number of times the hundred dollars increases. In this case the $100 turns into $3,200.

Stretch IRAs allow heirs to hold the retirement account longer, sometimes for generations. Imagine being able to have large amounts of money inherited that could double every decade. That is quite a financial asset. Admittedly, Stretch IRAs take advantage of tax omissions. In my opinion, it is rather unfair. IRAs are INDIVIDUAL retirement accounts, and are set up more to ensure an individual’s retirement and financial well being when they are older, not to provide wealth to kin.

What Happens Now?

To those who have inherited someone else’s retirement and are still reading, do not worry there are still ways you can avoid taxes without using a stretch IRA. The money from the retirement account is now considered an estate and now the distributions must be completed within 10 years. In other words, the retirement fund must have a balance of 0 in 10 years and any income distributed will be considered taxable income. While this timeline is not ideal to distribute a large amount of money efficiently, you can still minimize taxes on this estate. One of the simplest ways is to distribute the estate into traditional IRAs. The distributions you put into a traditional IRA is not taxed. However, you will need to consider maximum contributions. There are other ways to avoid the estate tax, which I will write about in another post.

To spouse beneficiaries, the same rules about distributions to your spouse apply to you. When a spouse inherits their spouse’s retirement, the IRS does not consider that inheritance an estate. You only have to start distributions at 72. If you or any other beneficiary is under 18, the timeline for distributions do not apply until the beneficiary is 18. Furthermore, disabled or chronically sick non-spouse individuals may receive distributions over their own lifetime. If you want to determine how this inheritance can be used, consult an inheritance lawyer.

The SECURE Act Does Not Allow The Use Of Credit Cards

Before, employees could use debt to save for retirement in employer retirement funds. Not anymore. The SECURE act prevents any saving or investment in a retirement by debt, even by refusing contributions by credit card, and sometimes even debit card.

I like this. The last thing employees should do is to go into debt for retirement. First, the interest on debt will negate the return of investments in your fund. Second, the interest from debt is guaranteed, the return of investments is not. Going into debt to save for retirement is a nasty habit. It needs to end.

Will The SECURE Act Improve Retirement?

Some praise the SECURE act as the next large step to improve retirement in America. Will it? The key to a good retirement is to start early and keep contributing consistently. The extension of the minimum age for RMDs and the removal of an age limit for contributions will do very little for retirement. What about the increase of accessibility to retirement fund options? Sorry but the accessibility to retirement has not changed that much. Some may say that the SECURE act allows part-time employees and graduate students to access quality retirement funds and removes restrictions in retirement contributions. My response: you mean like the Roth IRA?

Roth IRAs have no restrictions in age of contributions nor any RMD. Furthermore, you can start one at almost any brokerage firm, bank, or investment firm. Anyone who makes less than $139,000 ($206,000 for married couples) can contribute to a Roth IRA. In other words, almost anyone can start one. In addition, any withdrawals on your Roth IRA that you had for over 5 years when you are over 59.5 years old are tax free

Truth is, if the problem was access to retirement fund options, that problem was fixed a long time ago. We have never had so many options of where to put our money for retirement, much less with these benefits. Access to retirement was never the issue.

What Is The Issue?

There are many reasons people claim they have not saved for retirement (Bankrate survey chart shown below). The main reason people claim they have not saved/invested is because they have too many expenses. This may be true in some aspects. However, the desire for coffee and luxury apartments does not help. Even investing $100 a month starting at 25 would give you quite a nest egg. Are you honestly telling me you do not have $100 to spare each month? Disposable income has increased, not decreased. People just have a nasty habit of spending their disposable income, and not on assets.

Source: Bankrate

However, when you were/are/will be twenty, is retirement going to be on your mind? Even in the top 5? I pride myself on personal finance and retirement is not even in the top 5 things I want to take care of. When you are young, retirement is a long time off. It’s not that the young are ignoring retirement, it just doesn’t cross their minds much. Furthermore, they do not know that planning your retirement early will make it easier. No one will put a considerable amount of money to something that rarely crosses their minds. Sure people may talk about retirement, but if they never bring up how retirement goals are so much easier if you plan early, most people will just hear “retirement is a long time away.”

By having more people automatically enroll in retirement accounts, employees will have to think about retirement and talk with someone involved in finance. With any luck, the employees will determine that they can and should prepare for retirement.

Final Thoughts

The SECURE act is one of the most important laws passed to improve retirement for many employees in recent history. Unfortunately, it only does so much to help people retire. It only removes a few restrictions to save for retirement, and none of them will help retirees significantly. It does extend retirement accounts to many who did not have them before including part-time works and graduate students. Would this help them. I was a graduate student and did not have access to any 401k nor employer sponsored retirement account. That did not matter because I have a Roth IRA. But I knew about Roth IRAs and other retirement accounts. How many people know about these accounts, especially in their twenties?

Most People Do Not Know How To Save For Retirement

Not many people are told about retirement, nor why you should start early. Schools do not teach about finance readily, and parents would rather have the talk (you know which one) with their kids than the talk about money. As of right now, many people just starting to work while they are young and know next to nothing on how to manage money for retirement. Therefore, the most likely people who will show new workers how to manage money for retirement is the person who provides new workers their paychecks. It’s not the best setup, but its the most common one.

The best way to have employers guide workers to manage their retirement is to encourage providing retirement accounts with automatic enrollment. Employees will either be hands off of their retirement (better than having none) or will try to manage it. The SECURE act closes much of the gap for employees to be provided retirement accounts with automatic enrollment. While this will not make managing retirement particularly easier, this will encourage employees to consider what they must do for retirement.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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