Retirement: Are you ready? The SECURE Act, passed by Congress last year, may help you secure your employees' futures

Mckay Lindsey 

There comes a point in everyone’s career where retirement sounds increasingly more appealing, even for those who love what they do. According to a recent survey from Natixis Investment Managers, the average age at which Americans say they plan to retire is 62, with younger generations hoping to make that move even earlier than that.

More time spent in retirement means that it is critical to build a secure retirement fund throughout all stages of one’s career.

In early 2020, Congress passed the Setting Every Community Up for Retirement Act (SECURE Act), which made notable changes within large and small businesses to help employees “secure” their retirement. With the passing of this bill, the House hoped to make considerable progress in fixing our nation’s retirement crisis and help workers of all ages save for their futures. Many of these crucial changes impact working citizens within the U.S., including:

• The act makes it easier and less expensive for small businesses to set up safe harbor 401(k) plans.

• Allows more part-time workers to participate in 401(k) plans.

• Now 401(k) plans can offer annuities.

• Required minimum distributions (RMDs) were moved back from 70½ years old to 72.

• The age limit on IRA contributions was removed.

• Established a 10-year distribution schedule for non-spouse inherited IRAs.

• Set up penalty-free IRA and 401(k) withdrawals after the birth or adoption of a child.

• Allows 529 account funds to be used to repay up to $10,000 of qualified student loan debt.

 

401(k) Plan Changes. Under the SECURE Act, small businesses can receive a tax credit for starting a new retirement plan. The tax credit is the greater of $500 or $250 multiplied by the number of non-highly compensated employees up to $5,000. There is also a $500 tax credit for starting a new SIMPLE IRA or a 401(k) plan with automatic enrollment. These tax credits are available for up to three years.

Small businesses also have the option to save on income taxes by joining with other businesses in a Multiple Employer Plan (MEP), which is a retirement savings plan that was previously only an option for related companies. The failure of one business in the MEP will no longer disqualify the others in the MEP under the SECURE Act.

Although 401(k)s and IRAs are meant to be used for retirement, this act has made it easier for growing families to access their retirement funds to ease the financial pressures after the birth or adoption of a child. Up to $5,000 per individual may be withdrawn penalty-free from an eligible retirement plan ­_ 401(k), IRA, 403(b) or 457(b) – within one year following the birth or adoption of a child.

The eligibility barriers to participating in a 401(k) plan have been lowered to allow more part-time workers to participate. Employees of the age of 21 and older who work 500 or more hours for three consecutive years will now be eligible to participate in their employer’s 401(k) plan. The prior eligibility requirement was one year of service and 1,000 hours. While these part-time employees may be eligible to participate, employer matching contributions will not be required for these participants.

IRA Changes. For individuals of the age of 70½ after Dec. 31, 2019, required minimum distributions (RMDs) from qualified retirement plans and IRAs are not required until age 72. Participants of qualified plans may further delay RMDs from their current employer’s plan if they continue working past 72. With the removal of the age limit on IRAs, individuals with earned income may continue to contribute as long as they live. However, distributions from IRAs are still required after age 72.

Non-spouse beneficiaries of inherited IRAs are required to take RMDs over 10-years under the SECURE Act, rather than allowing beneficiaries to stretch RMDs over their lifetime. There are exceptions to the 10-year distribution schedule for certain eligible beneficiaries, including spouses, minor children, disabled individuals, those who are chronically ill and people within 10 years of the age of the IRA owner.

529 Education Savings Account Changes. Under the SECURE Act, an owner of a 529 plan may make a tax-free distribution of up to $10,000 to the account beneficiary to repay qualified student loan debt. It is important to note that these distributions are allowed under federal law; however, many states view these distributions as a non-qualified withdrawal.

There are important changes the SECURE Act has made to help you or your employees “secure” retirement. Additionally, a second version of this act (SECURE 2.0) was unanimously passed out of the House Ways and Means Committee on May 5. This act that could make saving for retirement more accessible to all working-class citizens. Most commentators seem to think the legislation will pass this session but are uncertain as to just how that will happen.

If you have any questions about how this act may benefit you, contact a financial professional for help.

Mckay Lindsey is a financial advisor, CPA and a wealth advisor for Squire & Co. in Provo.