How the Secure Act could affect your retirement savings

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

Published May 30, 2019 | 3 min read

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Updated Jan. 13, 2020: President Trump officially signed the SECURE Act into law. It went into effect on Jan. 1, 2020.

The 2019 year-end spending bill included the Setting Every Community up for Retirement Enhancement Act of 2019. Known as the Secure Act, this bill aims to improve the country’s retirement system.

“With passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” House Ways and Means Committee Chairman Richard Neal said in a statement.

The Secure Act is the biggest piece of retirement legislation passed in more than a decade.

“I think it’s very well intended,” said Thomas Rindahl, certified financial planner at TruWest Wealth Management Services. “It has a good set of provisions to help encourage and provide access to more retirement savings and security for workers.”

Here’s how the Secure Act could affect retirement plans.

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Retirement age

The Secure Act would remove the age limit for traditional independent retirement account contributions, currently capped at 70 ½ years old. It will also increase the age when retirement account holders have to start withdrawing from their accounts from 70 ½ to 72 years old.

“The great news is more people stay active beyond that age and continue to generate an active income,” said Vladimir Kouznetsov, certified financial planner and founder of Retegy LLC. “With longer life expectancy, it’s great to have an option to save additional money in a tax-deferred way.”

401(k) plans

The SECURE Act will make it easier for small businesses to set up 401(k)s by increasing the cap under which they can enroll workers in "safe harbor" retirement plans. The plan also offers a tax credit of up to $500 to employers who create a 401(k) or IRA plan.

Long-term part-time workers will also be able to participate in a 401(k) plan. To qualify they must work less than 1,000 hours in a year but more than 500 hours per year for three consecutive years.

There also will be increased options for low-cost income annuities for 401(k) plans, which would allow retirees to get a retirement payout in the form of regular payments instead of a lump sum.

Here's how to budget in retirement.

New parents

Parents will be able to withdraw up to $5,000 from retirement accounts penalty-free for qualified expenses under the Secure Act, within a year of birth or adoption. (Read our guide to financially preparing for a baby.) Parents can also withdraw up to $10,000 from a 529 plan to repay student loans.

“It may be helpful for new parents but can also create a tax trap for some of them,” said Kouznetsov. “The withdrawals are penalty-free but not tax-free. New parents will need to take into account that they will owe tax on the withdrawals at ordinary income tax rates the following year.”

Students can also use their 529 plan money on student loan payments, up to $10,000 annually.

Retirement account death benefits

Those who inherit a retirement savings account, including 401(k)s and individual retirement accounts, can no longer spread the distributions out over their lifetime. Instead they must do it within a 10-year period.

The removal of these “stretch” IRAs could create a larger tax burden and increase the need to have proper estate planning, said Rindahl. The change would also likely increase the depletion of inherited accounts.

Peter Pailon, certified financial planner and president of Master Plan Advisory, agrees.

“The government should be happy someone died with money to their name and passed it on,” he said. “People now have to take money out of these retirement accounts earlier. Younger people may not be as prepared for retirement.”

Don’t think you’ve saved enough for retirement? Here’s how to catch up.

Image: Huy Phan