The U.S. Senate nine days ago passed a new retirement bill. The SECURE Act, which had already been passed in the House and which President Donald Trump was expected to sign into law, is the most extensive retirement bill since the Pension Protection Act of 2006.
Starting Jan. 1, 2020, the new bill will push the age at which you need to start withdrawing money from your traditional retirement accounts to age 72 from age 70½. These required minimum distributions force you to take money that has been growing tax-free and pay the government its fair share. Many retirees have been taking the money already to live on. Those who have continued working, or do not need the money, will have more time before the RMDs kick in.
Individuals who are currently 70½ or older should not interrupt their RMDs, but proceed with them as scheduled under current rules. Those who will turn 70½ on or after Jan. 1, 2020, are subject to the new rules and will have an extra year and a half before they need to start withdrawals.
The law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income. Working past the traditional retirement age of 65 is a great way to shore up your retirement savings. More baby boomers will likely do this if they can, so it makes sense to allow them to continue to save in their traditional IRA and enjoy the tax deduction.
If you inherit an IRA from someone other than your spouse, this bill eliminates the rule that enables you to stretch the distribution from the inherited account over their life expectancy. Under the new law, most beneficiaries will have to withdraw all distributions from their inherited account and pay taxes on it within 10 years. This provision is not retroactive and will not affect those who have already inherited an IRA.
It’s pretty straightforward to save for retirement in a 401(k), but it’s another matter to calculate how to turn your life savings into a sustainable income. As I have explained in past articles, annuities are insurance products that help with this complicated task. Most companies have hesitated to offer them in their 401(k)s because of concern they could be held liable if the insurer failed. The bill gives increased legal cover to employers, but I believe the need to check insurer ratings will be greater than ever.
If you work part time or for a small business, you may have a 401(k) for the first time. It cost companies time and money to provide 401(k) accounts to their employees. The legislation makes it easier for small businesses to band together to offer retirement plans.
Such multi-employer plans are rare because current law requires participating companies to be similar, like from the same industry. The new law allows any combination of small businesses to join together to achieve economies of scale. The law also removes the problem of one member not following the rules, thus causing the whole group to be punished for their actions.
Separately, the law also would require employers who offer 401(k)s to expand access to part-time workers who work at least 500 hours a year for three consecutive years or 1,000 hours throughout the year.
A recent report from the Federal Reserve found that one-quarter of Americans have no retirement savings. Deciding to save more or work longer to provide a more comfortable retirement requires planning.
Seek out professional advice on how this new law can benefit you and your family.
Bob Hollick is a State Farm Insurance agent based in Washington.
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