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More Workers to Get 401(k) Investment Option
It appears Democrats and Republicans have found common ground recognizing that people are living longer and need to plan to have more money invested for their senior years.
In late December, Congress passed the “Setting Every Community Up for Retirement Enhancement Security” Act, or the SECURE Act, which has been signed it into law.
The act includes provisions designed to help individuals save and invest more for their retirement. It also encourages employers to provide more retirement benefits.
Many of these changes have been debated for years and are long overdue for an aging population. Expect this package of tax changes for retirees to be the first of many as the country continues to grow older.
As a result of the reform measure, more individuals will be able to participate in retirement savings through 401(k) investment plans.
Previously, individuals who had consistent part-time work were not able to participate in their employer-sponsored 401(k) plans.
The exclusion of part-time employees has been eased to include a larger portion of the workforce. Under the SECURE Act, individuals who have worked at least 1,000 hours in one year (roughly 20 hours per week) or 500 hours in three consecutive years will qualify to participate in a 401(k) investment plan.
This change recognizes the composition of a workforce that includes a large portion of part-time employees, and it should permit more individuals to participate in tax-deferred retirement savings.
The SECURE Act also will make additional income tax credits available to small employers to cover startup costs incurred when establishing qualified plans.
In addition, there is an easing of rules for groups of small employers who participate in multiemployer plans.
Again, the idea is to increase the number of individuals saving for their retirement in qualified plans by making it easier for employers to set up these plans.
Other key provisions that affect all Americans who plan to retire someday include:
A change to age 72.. You will now be permitted to continue to make contributions to your traditional individual retirement account past age 70½ years to 72 years of age.
Currently, only Roth IRAs allow contributions beyond 70½ years.
Also, the age for the start of required minimum distributions from an IRA or a defined contribution plan – a 401(k) for example – has been deferred, again from 70½ to 72 years of age.
This change is available to individuals who have not reached 70½ years of age before Dec. 31, 2019.
The effects on your retirement savings will be two-fold: More contributions can be made to the IRA, and the account balance of your IRA and defined contribution plan will have additional years of tax-free growth without a reduction for minimum distribution.
Distributions for birth or adoption of a child. Beginning in 2020, you will be able to withdraw from your IRA without penalty – but with taxation – up to $5,000 for costs associated with the birth or adoption of a child.
If both parents have retirement accounts, a couple could withdraw a total of $10,000.
The SECURE Act creates an exemption from the penalty tax for taking a distribution before age 59½. In addition, in order to preserve the retirement plan, the new act provides for the ability to reimburse the IRA.
Acceleration of RMDs from inherited IRAs. The SECURE Act does include a government revenue raiser. Previous to the act change, the nonspousal beneficiary of an inherited IRA could stretch the required minimum distributions over an expected lifetime, potentially providing years of tax-free growth with only a minimum annual distribution.
Under the new law, the distributions will be accelerated to a 10-year period with exclusions for certain beneficiaries such as a spouse, a special needs individual, or a minor.
These new distribution rules will apply to IRA owners who die after Dec. 31, 2019.
