What Every Investor over 55 Needs to Know about the SECURE Act
The new SECURE Act legislation aims to strengthen retirement security for Americans and combat the retirement crisis.
Pensions have all but disappeared. Social Security is uncertain.
People are now largely responsible for their retirement savings.
Yet, only 20% have saved 5% or less of their annual income, and less than one-third of Americans have saved 11% or more, this according to a February 2018 Bankrate study.¹
Vanguard reported the median 401(k) balance in 2019 for people age 65 and over was only $58,035.²
To try and remedy the retirement crisis, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) on December 20, 2019. And the law went into effect January 1, 2020.
There are numerous aspects to the SECURE Act that affect retirement planning and saving for all age groups.
However, if you are over 55 or close to retirement, there are a few key changes that may directly impact your current retirement plan…and how much you can save.
#1 Age Restrictions Lifted on Traditional IRA Contributions
The SECURE Act lifts age restrictions on traditional IRA contributions for tax years 2020 and beyond.
Under the old law, people could not make traditional IRA contributions past age 70½–even if they were still working.
Now, Americans working in retirement can save even more.
The Bureau of Labor Statistics estimates that by 2026…
- Americans age 65 to 74 participating in the labor force will increase to 30.2%, compared to 17.5% in 1996.³
- For workers 75 and older, it’s projected to be 10.8%, compared to 4.7% in 1996.
Couple that data with the U.S. Census Bureau reporting almost 15% of people in their 70s are still working, and this new law provides those still working in their 70s a chance to save more for retirement.⁴
If you are in your late 50s or early 60s, and are behind on saving, this change allows you to better plan for your retirement.
Critical component of this change: You are allowed to make a contribution for the 2019 tax year by April 15, 2020. However, you cannot make a contribution for 2019 if you were age 70½ or older as of December 31, 2019. You will be able to make IRA contributions for tax year 2020 and beyond.
Also, the law did not change for Roth IRA contributions, which has no age-based restrictions on contribution ages as long as there is earned income of at least the amount contributed.
#2 RMDs Start at Age 72
The SECURE Act raises the required minimum distributions (RMDs) from 401(k) plans and traditional IRAs from age 70½ to age 72.
This is good news for many people because, as more people are living and working longer, it allows them to let retirement savings grow another year and a half before having to tap into it.
Critical component of this change: This change only applies to people who reach 70½ after 2019. If you turn 70½ in 2019, you will have to take the first RMD by April 1, 2020, to avoid a 50% penalty. If you turn 70½ after January 1, 2020, you have two more years (until you turn 72) to take your RMD.
If you’re still working after 72, you are able to postpone taking RMDs from your employer’s plan until after you retire.
#3 Part-Time Workers May Participate in 401(k)s
The LIMRA Secure Retirement Institute conducted a survey of recent and pre-retirees ages 55-71 who plan to retire or have retired in the past 2 years.
The 2019 report showed that 1 in 5 people continue to work in retirement. Specifically,
- 37% of pre-retirees said they plan to work part-time in retirement, and 17% expect to reduce their hours before they fully stop working.
- 19% of retirees are working part-time, and 17% have reduced their working hours.⁵
Whether it’s because people need to work due to lack of savings or because they simply enjoy working, the SECURE Act changes may greatly benefit part-time workers in retirement.
Until now, part-time workers who worked under 1,000 hours per year were mostly ineligible by plans from participating in their employers’ 401(k) plans.
Under the new law, long-term, part-time workers who have worked at least 500 hours per year for at least three consecutive years or those who have worked one full year with 1,000 hours clocked will be eligible to participate in their employers’ 401(k) plans.
The new rule does not apply to collectively bargained employees.
This SECURE Act change will take effect in 2021.
Check out our guide and discover How to Supercharge Your 401(k) Today.
#4 No More Stretch IRAs
While this SECURE Act change does not affect the amount of income you have during retirement, it’s important to understand it because it affects your beneficiaries.
The SECURE Act imposes stricter rules for “Stretch IRAs,” or post-death requirement minimum distributions.
Specifically, it changes how non-spousal beneficiaries withdraw their money from IRAs, 401(k)s, 403(b)s, and 457 plans.
Under the old law, non-spousal beneficiaries were able to stretch the required minimum distributions (RMDs) from an inherited account over their own lifetime.
Under the new SECURE Act, non-spousal beneficiaries must withdraw the entire balance from an inherited IRA, 401(k), 403(b), and 457 plan account within a 10-year period after the owner’s death.
There are no required minimum distributions within those 10 years.
This may potentially cause a tax burden for many people, as they are forced to take the full distributions in a limited time frame.
There are some exceptions to the new rule.
- If the beneficiary is a spouse, he or she can still make the deceased spouse’s IRA, 401(k), 403(b), or 457 plan his or her own and does not have to take it as an inherited account.
- Distributions over the life of a non-spouse beneficiary are allowed if the beneficiary is chronically ill, disabled, or no more than 10 years younger than the deceased account owner. Exceptions also apply to minors; however, the 10-year rule kicks in when they reach adulthood.
Recommended Next Step If You’re 55 and Over
The SECURE Act will affect you one way or another, which is why we recommend you reach out to a third-party expert to examine how these changes directly affect you.
In the age of low-cost robo advisors and financial DIY tools you can access on your smartphone, many people overlook the importance and value of third-party expert advice.
Although you might have basic investment knowledge, utilizing an expert to make the moves that require skill and care may help boost retirement savings…
Even if you are a few months or years away from retirement.
Studies show that working with a financial advisor may increase your retirement income and greatly impact the type of retirement lifestyle you can afford.
From 2006 to 2012, Aon Hewitt and Financial Engines conducted a study where they compared the returns of investors who sought help in the form of online sources or managed accounts to those who managed their 401(k)s themselves.
The study, which examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers, concluded that people who got professional help earned higher median annual returns than those who invested alone.
In fact, “Participants who got Help received, on average, 3.32% (net of fees) more in return annually” than those who managed their own portfolios.⁶
“If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).”⁷
In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., reported a 3% average increase in the value of portfolios of clients who work with a good financial advisor.⁸
Morningstar’s David Blanchet, Head of Retirement, CFP, CFA, published a 2014 study titled The Impact of Expert Guidance on Participant Savings and Investment Behaviors.
The report revealed that participants who received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁹
What impact would a potential 40% increase in income at retirement have on your life?
Chances are, it may help you sleep better at night and lessen anxiety about running out of money.
Not sure where to turn for help? Check out our no-cost guide on how to understand The Different Types of Licenses Financial Advisors Have and What They Mean to You.
9.David Blanchet, Head of Retirement, CFP, CFA, Morningstar 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”