The SECURE Act Makes Changes to Retirement Savings: Learn Them Today
- Author: Jacob Greene
- Posted: 2024-07-24
Raise in the Required Minimum Distribution Age
Previously, Americans with a 401(k) or an IRA account were required to take a partial distribution from this account when they reached the age of 70.5. This number was set by law in the 1960s and has not changed since then. However, in the past half century, Americans are living longer and more of them now face tax implications when they withdraw their retirements funds. This is because the retirement assets that were previously tax-deferred are now taxable when they are distributed. Now, the SECURE Act raises the minimum distribution age to 72. Still, Americans who do not take their withdrawal by that age face a penalty. The IRS still wants to get their tax on your money while you are still alive, but now they are giving you more time to let your retirement assets accumulate.
Inherited Accounts Are Now Taxed Quicker
In the past, if you inherited an IRA account as a beneficiary of someone who had passed, you were able to maintain the account over a lifetime and you were not required to take distributions of the entire account by a certain date. Instead, in this "stretch IRA," you were able to take the required minimum distributions over the course of a lifetime. Under the SECURE Act, you are not required to take any minimum distributions for up to ten years. However, after the end of the ten year period, you must take distribution of the entire account. This speeds up the the timeframe that you have to pay taxes to the IRS on the entire account amount. This can have a significant impact on taxpayers who inherit account from their deceased parents when they are in their working years and it is a way for the IRS to speed up a tax that functions like an estate tax.
More Workers Can Participate in Retirement Plans
In the past, certain small business workers were not able to participate in an employer-sponsored retirement plan. Small businesses had some difficulty offering their employees these plans. In order to administer their own plan, small businesses must incur fees and costs that often made it not feasible to offer employees this option. In the event that they did, fees served to limit the offerings.
Small businesses were able to band together to offer common retirement plans, but they faced restrictions in doing so. Under the old law, small businesses must share a "common characteristic." Most often, this meant that the companies were all in the same industry. Even if one company did not share a common characteristic with everyone else, all of the rest of the companies could not join the common plan. The new law relaxes those rules and allows diverse employers to join together in a common retirement plan.
In addition, the SECURE Act also gives numerous tax credits to employers to help them fund the costs of starting up a retirement plan. There is a $5,000 tax credit for businesses to be reimbursed the startup costs from setting up a retirement plan. There is an additional tax credit for employers who establish a plan that allows for automatic enrollment. Many employees end up forgoing retirement accounts that they have to physically sign up for since they often do not understand how to get started.
Annuities Are Now Allowed in 401(k) Accounts
In the past, employers had the obligation to make sure that annuities were suitable investments for employees' retirement accounts. This kept them from offering annuities as an option. Now, the suitability responsibility belongs to the insurance company that is selling the annuity. Now, retirees will be able to purchase annuities which give them a guaranteed income in retirement. There are many different annuity structures that can provide retirees with different income options in retirement that they can now access.
You should consult with a financial planner or retirement adviser to learn the ins and outs of the new legislation and how it will impact your particular financial situation.
