What does the SECURE Act mean for me?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act brings much needed reform to the retirement system and helps more Americans save for the future, increase their savings and gain access to guaranteed income for life when they retire.
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New legislation opens the door to greater retirement security
The SECURE Act, which took effect January 1, 2020, is one of the most significant pieces of retirement legislation in over 13 years.
The Act expands retirement plan access to many part-time employees, allows small businesses to easily set up more affordable plans, and changes many rules relating to tax-advantaged retirement plans like IRAs and employer-sponsored plans. Below are some of the changes you should know about.1
Guaranteed income for life now available for more employees
Other than pensions and Social Security, annuities are the only retirement option that can guarantee income for as long as you live. They give you dependability and certainty that you will have “salary” in retirement that can help cover your basic, everyday living expenses without worrying about outliving your income.
The new SECURE Act rules will now:
- Make it easier for employers to include annuities as an option in their retirement plans
- Require employers to show employees how their retirement account balances translate into guaranteed monthly income
- Enhance the ability of plans to distribute lifetime income investments in certain circumstances
Knowing how much you need in retirement is vital for your future. We can help you determine how much income you might expect in retirement from existing assets.
You can now make IRA contributions beyond age 70½
Previously, you could not contribute to a traditional IRA once you reached age 70½. This rule has been eliminated, so you can now contribute at any age, if you qualify. This may help people who continue working into their 70s.
Need to make a contribution change to your IRA? We’ve made it easy to update your retirement plan .
Frequently asked questions about the effects of the SECURE Act on IRAs
- Yes, beginning with tax year 2020. Although the law passed in late 2019, its effective date was January 1, 2020. This means that an individual with earned income can now make a tax year 2020 Traditional IRA contribution at any age, though they still cannot make a tax year 2019 contribution if you turned 70½ by Dec 31, 2019, even though the IRS allows tax-payers to make a 2019 contribution through the tax-filing deadline in 2020 (July 15, 2020).
- That depends on the type of beneficiary. The old rules allowed a beneficiary to “stretch” the IRA distributions over their lifetime. This was especially beneficial to your beneficiaries with long life expectancies. The new rules categorize beneficiaries as eligible or non-eligible. Eligible beneficiaries (spouse, minor child, disabled person, or person no more than 10 years younger than you) can still withdraw the funds over their lifetime. However, non-eligible beneficiaries (anyone else) must withdraw all of the funds within 10 years of your passing. There is no requirement to withdraw funds annually, but the entire balance must be withdrawn at the end of the 10 year mark.
- Prior to the SECURE Act, you could not contribute to a Traditional IRA once you reached the age 70½. The SECURE Act eliminated the age restriction on Traditional IRA contributions. Beginning with tax year 2020, people with earned income can now contribute to a Traditional IRA regardless of their age. If you earn too much to make a deductible contribution, you can still make a non-deductible Traditional IRA contribution, as there are no income limits to do so. Your contribution, when withdrawn, is paid out tax-free, while only your earnings are counted as taxable income. You can also convert those funds to a Roth IRA allowing your money to not only grow tax-deferred, but provided you meet the withdrawal rules, your earnings will be distributed to you tax-free as well.
Required Minimum Distributions (RMDs)
Required minimum distributions now begin at age 72
Until now, RMDs, or the amount you have to take out of your pre-tax retirement accounts annually to claim on your taxes, started at age 70½. This age has now been raised to 72 for people who reach age 70½ after 2019 (born after 6/30/1949), giving your money more time to potentially grow before you have to take it out and pay taxes on it.
RMD rules can get complicated quickly, so it’s a good idea to review our RMD portal to make sure you know which of your accounts have RMD requirements, when you need to begin withdrawals, and how much you need to take.
Frequently asked questions about RMDs and the SECURE Act
- The new RMD age is 72, however this only applies to those whose birthday is July 1, 1949, or after. If you were born on or before June 30, 1949, you turned 70½ by December 31, 2019, and you still fall under the old RMD age of 70½.
- The SECURE Act pushed the RMD start date to age 72 for IRAs as well as employer plans such as 401(k), 403(b), etc. This new date applies to anyone who did not attain age 70½ by December 31, 2019. The new start date allows your money to continue growing tax-deferred for longer. If you were counting on that income to pay for your expenses, consider adjusting your spending based on the income sources you currently have. If you still need additional income, it may make more sense to withdraw funds from other accounts like savings or after-tax accounts. The key is allowing the tax-deferred status of your IRAs and other qualified retirement plans to continue working for you as long as possible without having to pay taxes on their withdrawal.
Retirement Plan Beneficiaries
New inherited IRA rules for beneficiaries
A significant change affects the beneficiaries of retirement accounts, including employer plans and IRAs (traditional, Roth and others). The new law requires non-spouse beneficiaries to take out the entire balance within 10 years instead of “stretching” payments over their lifetime.2 This rule does not apply to:
- Disabled or chronically ill individuals
- Minor children of account owner (until they reach the age of majority)
- Anyone else not more than 10 years younger than the original account owner
- Anyone who inherited a retirement account prior to January 1, 2020
Frequently asked questions about beneficiaries and the SECURE Act
- The SECURE Act should not affect the withdrawal schedule for your spouse as he/she is an eligible beneficiary. Prior to the SECURE Act, individual beneficiaries of any age or relationship could inherit IRA funds and distribute them over their lifetime. The new rules classify beneficiaries as eligible or non-eligible. Eligible beneficiaries include a spouse, minor child, disabled person, or another individual who is no more than 10 years younger than you. Everyone else is considered a non-eligible beneficiary and must withdraw 100% of the funds within 10 years of your passing.
- If your funds are in a Traditional IRA, your adult children and grandchildren, or another non-eligible beneficiary, must withdraw the entire account balance in a rather short amount of time, and the funds will be counted as taxable ordinary income to them. Example: Your account balance at the time of your passing is $1,000,000. Your grandchild must withdraw the entire balance within 10 years from that date. He or she can do so by taking 1/10th annually, half now and half at the 10 year mark, all of it at the 10 year mark, or in some other way that suits his or her income needs. The bottom line is that your young grandchild is responsible for paying taxes on distributions totaling $1,000,000 in that 10 year period and must withdraw all of the funds even if he or she doesn’t need them.
- Yes. A strategy available to you today is the Roth Conversion. A Roth Conversion allows you to convert some or all of your Traditional IRA funds to a Roth IRA. Most Traditional IRA funds are pre-tax, meaning when you made the contribution, you deducted it from your income the following year. Because of this, a Roth Conversion usually represents a taxable event. If you’ve made non-deductible Traditional IRA contributions in the past, seek tax guidance, as the IRS requires you to use a formula to determine what portion of the Roth Conversion is taxable vs. non-taxable. Remember TIAA does not provide tax advice. Please consult your tax advisor for your specific situation. Example: If you want to leave $1,000,000 to your children and grandchildren, you could convert $100,000 of your Traditional IRA to a Roth IRA each year for 10 years. This will only add $100,000 to your taxable income each year, rather than if you were to convert the entire balance at once. Once the converted funds have been in the Roth IRA for 5 years, they become qualified Roth dollars and can be withdrawn by you, or your beneficiary, absolutely tax-free. If you pass away and have successfully converted the entire balance to Roth, your children and grandchildren will be able to withdraw the funds within 10 years tax-free.
Small Business Changes
New rules help deliver retirement plans for small business workers
Many of the SECURE Act’s rules are designed to allow more people to save for retirement within their workplace retirement plans. A few examples include:
- Giving incentives to small businesses to set up retirement plans
- Allowing smaller employers to join together to offer a retirement plan to their employees
- Requiring 401(k) plans to permit certain long-term, part-time workers to make contributions
- Increasing the amount that can be contributed under automatic enrollment and contribution plans to improve retirement savings for those that aren’t actively engaged in their plans
- Allowing penalty-free withdrawals—from IRAs and from retirement plans that allow withdrawals—for birth or adoption expenses, up to $5,000 from each parent’s account, along with the ability to pay the money back
Use 529 funds to help pay down student loan debt
The law now allows families to use a 529 account to pay up to $10,000 in student debt over the course of the student’s lifetime. A 529 plan can also be used to pay for certain apprenticeship programs.