BRIDGING THE GAP
How the Secure Act Affects Financial Planning for Those Under 50
The Setting Every Community Up for Retirement (SECURE) Act was signed into law by President Trump on December 20, 2019 and brought many changes for those in all stages of life, as well as making it easier for small businesses to set-up retirement plans for their employees. Today I will focus on changes that will primarily affect individuals under 50. Take a look at the sidebar for a summary of overall plan changes.
For those under 50, there are changes to both how to access funds in a 401k and how funds can be used in 529 plans that may be helpful to you.
First, part-time workers are now eligible to participate in a 401k – as long as you work at least 500 hours over the course of a year, and have three years of employment history – employers are now required to offer you participation in a 401k if it is offered at the company. This will affect many women who work part-time while balancing being caretakers of children and older parents, who can now take a more active role in saving for their future. Since women are also outliving men, this should help reduce the burden of retirement planning on families.
Second, having a baby or adopting a child now counts as a reason for allowing a qualified distribution without paying the 10% penalty. While taxes will still be paid, this distribution can be taken by either or both spouses up to $5,000 total to cover expenses related to bringing a baby or adopted child into the household. Having a baby has become more and more expensive, and this provision is designed to help families defray some of these expenses.
Qualified hardship distributions can also be repaid within three years with no taxes owed. If they are not repaid, they are taxed over a three year period. This includes money taken out for having a baby or adopting a child.
Previously, loans could be taken out against an individual’s 401k account but there were limits to the amounts that could be taken. Loans were also required to be repaid starting immediately. Today, employers can allow loans of up to $100,000 and repayment can be delayed up to a year.
And last, funds in a 529 have several new ways to be used. They can be used to pay for an apprenticeship if the beneficiary decides not to go to college. Funds can also be used to payoff student loans for the beneficiary or a beneficiary’s sibling (up to $10,000/year in loans can be paid off).
If you have any major financial decisions or life changes coming up, or simply want to know how these changes will affect you individually, reach out to your financial advisor. This is the most comprehensive change to retirement and financial planning legislation in 13 years – making sure that you are able to take advantage of the changes as best benefits you and those close to you is important to you (and their) future.
SECURE ACT SUMMARY
Retirement for Individuals
- The age you are required to take a minimum distribution is extended to 72 from 70 ½.
- IRA contribution age limits have been removed.
- Part-time workers are eligible for 401k participation with restrictions.
- Stretch IRA for a non-spouse beneficiary is gone.
- Qualified hardship distributions can be repaid within three years. If not repaid, taxed over a three year period.
- Having a baby counts as a hardship and allows a $5,000 distribution to pay for related expenses.
- Loans can be taken up to $100,000 and repayment delayed up to a year.
529 Legislation Changes
- Funds can be used to pay for an apprenticeship.
- Funds can be used to payoff student loan for beneficiary OR a beneficiary’s sibling.
Article written by Kristin Carleton
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