Are you struggling to save enough for your golden years? Well, there can be good news for you! Yes, you heard it right!
President Donald Trump signed a new law on December 20, 2019, known as the SECURE (Setting Every Community Up for Retirement Enhancement) Act. It mainly focuses on retirement planning in three areas like:
- Modifying the required minimum distribution (RMD) rules for retirement plans
- Expanding access to retirement plans
- Increased lifetime income options in retirement plans
If you are on the verge of retirement or recently retired, the SECURE Act 2019 can help boost your savings! But how so?
Let’s find out!
Relief on Required Minimum Distribution (RMD) for retirement plans
Prior to the SECURE Act, if you stashed money in a traditional IRA (Individual Retirement Account) or a 401k, you had to make withdrawals at the age of 70½. But the SECURE Act pushes the age that triggers RMDs from 70½ to 72. Thereby, you are getting extra 1½ years to allow your IRA or 401k to grow your dollars without being depleted by distributions and taxes! So, if you have not hit 70½ by the end of 2019, you can definitely take advantage of this Act!
No age bar on IRA contributions
Earlier you could not make contributions to a traditional IRA once you reached age 70½. But with the SECURE Act, you can! For tax years starting in 2020 and beyond, you can make contributions even after reaching the age of 70½. And that’s obviously a good thing! So, if you are planning to work into your 70s, you can still stash money into a deductible IRA.
You can get additional Roth IRA planning opportunities
As RMDs start from 72, the new law will provide you an additional 2 years to grow your money. You can also opt for Roth IRA conversions without having to worry about the impact of required distributions. With a Roth IRA, withdrawals are tax-free (unlike traditional IRAs) as long as you meet certain requirements and there are no RMDs in your lifetime. The goal of a Roth conversion is to convert your taxable money in an IRA into a Roth IRA at lower tax rates!
401k for part-time employees
Are you a part-time worker?
Then you should also save money for your golden years! But earlier in the year, part-time workers who had not worked at least 1000 hours were not allowed to participate in a 401k plan. But this is gonna change! Starting in 2020, the new law assures 401k plan eligibility for employees who have worked at least 500 hours per day for at least 3 consecutive years! But you should be at least 21 years old after those 3 years!
Penalty-free withdrawal of birth or adoption of a child
Is your new baby on the way? Or are you planning to adopt a child soon? Then congratulations, buddy!
But at the same time, you might be worried thinking about how you are going to pay for the birth or adoption costs. If you have a retirement account, the new SECURE Act can let you take out an amount up to $5,000 following the birth or adoption of your child! And guess what? You don’t need to pay the usual 10% early-withdrawal penalty! You have 1 year from the date your child is born or the adoption is finalized, to withdraw funds from your retirement funds. You can also put that money back into your retirement account at a later date. Your contribution amounts will be treated as rollovers and won’t be included in taxable income.
Small businesses offering retirement plans
I know that it can be quite tough for you to save for your retirement if your employer doesn’t offer a 401k. This happens especially with small businesses! Whereas, almost all large employers have retirement plans for their employees. So, the new SECURE Act has introduced two ways to help more small businesses offer retirement plans to their employees!
Let’s have a look!
- The new law has proposed Open Multiple Employer Plans (MEPs).These MEPs allow unrelated small businesses to pool their resources together to offer a workplace retirement plan.
- The new Act increases the tax credit available for 50% of a small business’s retirement plan start-up costs. Before this Act, the credit was limited to $500 a year. But now, the maximum credit amount is up to $5,000.
You can save more by being a student
If you want to contribute to a traditional or Roth IRA, you must have taxable compensation! The annual IRA contribution limit is the smaller of your taxable compensation or the $6,000 IRS limit. And if you are 50 or older, the limit is $7,000. The new law has added a category of compensation that qualifies as eligible for IRA contributions. Well, that’s good news if you are a student and get non-tuition fellowships and stipends.
So, you can stash some money from the qualified fellowships and stipends in an IRA every year! By doing so, you can plan for your early retirement too! However, I would advise you to go through the pros and cons of early retirement first, before you plan for it!
As you can see, there are many aspects of the new law! But we have tried to highlight the most prominent ones.
So, it’s always advisable to consult a professional financial planner to know more about the new rules and apply them in your financial and retirement planning!