With pensions disappearing the responsibility now falls on ourselves to save and invest for retirement. However, there are clearly still flaws in this as almost 1/4th of Americans do not have enough saved for retirement. This has led to the House of Representatives to pass the SECURE Act, which would affect your ability to save money for retirement and influence how you use the funds over time if it is ultimately enacted. Here are 5 ways that the new bill may affect your retirement savings.
- RMS’s start at age 72
RMD’s from traditional retirement plans have always been a thorn in the side of retirees. As soon as one reaches age 70 ½ they must begin withdrawing funds from their plan even if they do not elect to. This is the governments way of getting the taxes that you have been deferring until now. Under the SECURE Act the RMD age will be pushed back to 72 allowing your funds to continue to grow before the required drawdowns begin.
- No age restrictions on IRA contributions
Americans are working and living longer than ever before. However, if you work passed the age of 70 you are no longer able to contribute to a traditional IRA. The SECURE Act is looking to change this to allow contributions for as long as you work.
- 401(k)s for part time employees
Until now an employee has been required to work at least 1000 hours a year to be eligible for a workplace retirement plan. That could change under the SECURE Act. If enacted, it would guarantee 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years.
- Penalty-free withdrawals for birth or adoption
The SECURE Act hopes to lessen the burden on expecting and adopting parents by allowing penalty free withdrawals from an IRA. Following the birth or adoption of a child each parent would be allowed to withdrawal $5,000 without incurring the 10% penalty.
- Auto-Enrollment 401(k) plans would be enhanced
More companies are automatically enrolling eligible employees into their 401(k) plans. Workers can always opt out of the plan if they choose, but most don’t. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible. For a common type of plan known as a “qualified automatic contribution arrangement” (QACA), the employee’s default contribution rate starts at 3% of his or her annual pay and gradually increases to 6% with each year that the employee stays in the plan. However, under current law, an employer cannot set a QACA contribution rate exceeding 10% for any year. If enacted, the SECURE Act would push the 10% cap on QACA automatic contributions up to 15%, except for a worker’s first year of participation. By delaying the increase until the second year of participation, some lawmakers want to avoid having large numbers of employees opt out of these 401(k) plans because their initial contribution rates are too high. Overall, the proposed change would allow companies offering QACAs to ultimately put more money into their workers’ retirement accounts while keeping the potential shock of higher initial contribution rates in check.
If you have any questions about your retirement plan or how it could be impacted by this new bill please feel free to contact us and we can help.