If you were strolling through the cafeteria at work and heard your colleagues talking about a new retirement bill, one that includes some of the most important potential changes to retirement rules seen in years, to boost your retirement savings, you would probably be saying, “Oh yeah. That’s for me.” Well, that could very well be.
The Setting Every Community Up for Retirement Enhancement Act, also known as the Secure Act, is touted as being the most significant retirement reform in more than a decade. It is designed to help more people save more money for retirement at a time when life cuts larger pieces out of that pie you call a paycheck until there are only crumbs. So, go ahead and yell, “Hallelujah!” it’s okay. A lot of people will.
How it works
– Built into the Secure Act is a provision for small businesses to join together to offer pooled retirement plans to their employees. Tax credits are the perfect enticements to join the pool and offer lifetime income annuities to 401(k) participants for future pension-like payouts.
– Long-term part-time employees would gain access to workplace retirement plans – a huge benefit for part-time workers, especially women, who are either preparing for or already in retirement. Roughly 28% of people work after they’ve retired.
– The Act raises the required minimum distribution age from 70½, the age where you stop putting money in and start taking money out, to age 72, allowing you to continue contributing to your plan if your company doesn’t age you out even earlier. Sadly, more than half of older U.S. workers are pushed out of longtime jobs before they choose to retire.
– Interestingly, the Secure Act creates new rules that may expand lifetime income options within your workplace plan, like using lifetime-income annuities to help you establish a reliable income stream in retirement. Buying annuities is easier because employers who sponsor 401(k) plans to offer them with no legal liability.
– You can withdraw up to $5,000 from a retirement account to cover certain expenses related to a newborn or adoption of a child.
– In addition, families could tap into their 529 plans, if still paying on student loans, to the tune of $10,000 a year.
– The Secure Act changes the rules about inheriting retirement accounts. Typically, surviving spouses receive the money and take it out over a period of time. With the Secure Act, if you inherit an IRA or a retirement account and if you are not the spouse, you must take the money out of that account within 10 years. The government taxes the money according to your income tax bracket at the time of withdrawal. “We’re supportive of it,” says Hefren Financial Advisor Amy Riley. “But the inherited account is of the most concern because it will require more financial planning for the IRA holders. In fact, it could push IRA beneficiaries into a higher tax bracket.” Essentially, the Secure Act would do away with the stretch IRA.
Are there other reasons?
As you know, pensions are almost a thing of the past, and saving for retirement today is self-directed. Except, six in 10 non-retirees who hold these self-directed retirement savings accounts have little to no comfort in managing their investments, according to the Fed’s household well-being survey. And, as research has shown, people are either not saving or saving too little. Sure, procrastination is one thing; but not saving enough because you cannot afford to is quite another. It is a sad commentary to what the government now calls a major retirement savings crisis.
“There is general agreement on both sides of the aisle that people need to be saving for retirement, and we want to create the incentives and vehicles for them to do so,” says Elizabeth Kelly, senior vice president at United Income who served as a special assistant to the president at the White House National Economic Council under the Obama administration. She says these provisions are a step in the right direction.
The Employee Benefit Research Institute reported that 80% of their participants would consider using some or all their account balance to buy a guaranteed lifetime income option and are saddened that millions of Americans do not have access to workplace retirement plans. Another survey reported that 42% of all private sector workers don’t have access to a retirement plan.
In the final analysis, if you own a 401(k) plan, consider maxing it out every year because it will come back to you in spades, as people often say. Because further research has shown that one of the most effective ways to get people to save is through a workplace retirement plan, you are fortunate to be able to participate.
The Secure Act is truly an important piece of legislation for our times. This first step to remove the barriers for people who do not have access to a workplace retirement plan opens the door to even more reforms and better provisions, commonly known as “game changers.”
If you would like more information about 401(k) retirement planning, or the Secure Act, contact us today. Our MASTERPLAN customized financial planning is designed for your specific needs and goals.