How The New Retirement-Savings Law Will Impact 401(K) Plans And IRAs

Federal Employees

Due to the dissolution of old pension plans, a considerable part of the American population continuously hustles and unearths money for their retirement. Many people rely on their 401k and IRAs. Still, the arrangement has apparent flaws, as thirteen percent of workers aged 60 and up have no retirement savings.

In an attempt to fix the broken retirement system, President Donald Trump signed the new retirement-savings law on December 20, 2019, which indicates favorable changes in the way Americans plan and save money for their retirement. The Setting Every Community Up for Retirement Act, widely known as the SECURE Act, approaches as the most extensive retirement savings reforms that took place since the Pension Protection Act of 2006.

How SECURE Act Will Impact Retirement Plans

Most of the different provisions of the SECURE Act became effective on January 1. One of these benefits the adjustment of the starting age for Required Minimum Distributions or RMDs. Withdrawing money from traditional IRAs and employer tax-deferred accounts will start at the age of 72, and not 70½. Considering that people are living and working longer, this age adjustment allows them more years to contribute to their retirement accounts.

Other notable changes under the SECURE Act include:

  1. SECURE Act lifts age restrictions on IRA contributions.
  2. Part-time employees can now avail of 401k contributions.
  3. Both 401k and IRA now allows penalty-free withdrawals for childbirth or adoption.
  4. Enhanced Auto 401k enrollment plans.

These provisions are only a few of the many highlights that hailed the SECURE Act as one of the most progressive retirement savings reforms. There are around 29 significant changes in the bill, most of which offer a more positive impact for 401(K) plans.

IRAs Are Becoming Less Popular

According to the Investment Company Institute, IRAs cover around 33% of all retirement assets as of the year 2019. Although IRAs currently include an overwhelming percentage, people contributing new money to IRAs are gradually decreasing. And the complexity of the account makes one reason for this.

There may be a considerable number of Americans who perceive IRAs as a complicated option for their retirement savings. This complexity is credited mostly to the account rules such as qualifications, amount of contributions, taxes, penalties, and other factors.

The emergence of the SECURE Act didn’t help that much considering that the more significant effect is with 401(K) plans. The SECURE Act further increased the chances of expansion for the 401(K) plans by making it more convenient and less costly for small businesses to offer them to their employees.

With the new SECURE Act, the US expects 401k to grow. In contrast, newly opened IRA accounts continue to decrease, despite its flexibility and better tax benefits.

Which Provisions Have The Most Impact On IRAs?

There are several provisions on the SECURE Act that significantly affect IRAs. Some may be beneficial, while others can be unfriendly for some. Here a few of the changes IRA owners should take into consideration.

RMDs will start at age 72

As mentioned above, Required minimum distributions will no longer start at Age 70½. It is one of the provisions that affect both 401(K) plans and IRAs. The additional 1½ year might seem like a minor change. Still, to someone who doesn’t need the money, the amendment provides them an extension of enjoying the tax-free savings growth.

This provision poses a disadvantage for those who can’t afford to wait until the age when RMDs begin. Still, for most IRA owners, this is less of a problem. While there are a few who need to live off their IRAs earlier, this is not the case for most IRA account holders. According to the Investment Company Institute, around 40% of IRA owners move the funds to other investment accounts after withdrawing their RMDs.

Contributions are now allowed even after the age of 70½. This provision, no doubt, has the least adverse effects to IRA owners. It provides them with an option to further their contributions.

Although there is no age cap in contributing to a Roth IRA, placing contributions to a Traditional IRA after the age of 70½ was previously prohibited. But as working past the customary retirement age of 65 has become the usual circumstance in the US, the SECURE Act sees that it is only fitting to allow older workers to continue saving up and to take advantage of the tax-free deductions. Traditional IRA owners can now keep their contributions even after the age of 70 ½ provided that they are still working and are earning employment-related income.

The Dissolved IRA Stretch

A disadvantage of the new retirement-savings law lies in the demise of the IRA stretch. Previously, the law gives a ten-year limit for the beneficiaries to withdraw all the contributions. Spreading their distributions allows the funds to compound decades further and delay the payment of taxes from the fund.

But with the latest provision, IRA owners no longer have the option to set up an IRA stretch that will regulate the money coming from the distributions. Receivers who live extravagant lifestyles are more likely to tap into the account quickly misspend the funds.

This provision is mostly beneficial to the US government. Implementing RMDs is the government’s way of reaping the rewards after providing a tax deduction-free savings plan. By applying a 10-year limit, this requires beneficiaries to pay for inherited IRAs sooner.

But not everyone sees the removal of IRA stretch as a problem. Some IRA investors preferred to not go with this option as they would enjoy tax-deferred money for three to four decades. IRA owners only need to worry whether their beneficiaries would splurge the cash or not.

The SECURE Act Opportunities

After the new SECURE Act takes effect, 401(K) plans are more likely to expand as compared to Individual Retirement Accounts. Even before the legislation of this new retirement-savings law, IRA’s popularity has dwindled due to several factors such as complexity, and that it has to be set up by the account owner himself.

Some provisions in the SECURE Act are undoubtedly beneficial to IRAs. Yet, many believe that some parts of the new law itself require additional consideration. The more significant challenge of the government still points to the decreasing popularity of IRAs, which serves as another beneficial retirement-savings option if only everyone fully understands its perplexing details.

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