To stave off a looming government shutdown, the House and Senate recently reached an agreement on a set of 12 spending bills.
The legislation brings forth a series of changes, including raising the age to make tobacco purchases to 21, boosting funding for the census, and stabilizing pensions for miners.
Part of the year-end agreement includes the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act. This bill includes significant changes aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
So, what do all these changes mean for investors, old and new? Let’s take a look.
Full-time working adults
Many employers have long been reluctant to include annuities in their offerings. This hesitation comes from a fear of being responsible for payments if the annuity company goes under — even years after the employee has left the business. While the new legislation eliminates some of the liability for employers, they are still responsible for choosing dependable providers.
As an investor, make sure you understand what you are giving up now for guaranteed income in the future. Look beyond the sales pitch and seek expert financial advice on where you’re placing your investments.
While annuities can provide an opportunity for guaranteed income throughout your lifetime, there is still room to get sucked into the wrong types of investment plans.
Long-term, part-time employees
The workforce is full of employees who work up to 34 hours per week. While they are considered part-time workers, many of these individuals have been with the same company for years but have not had the opportunity to take advantage of benefits or invest in 401(k) retirement plans.
The new deal makes these long-term, part-time employees eligible for certain investments, with the expectation that they work 500 hours a year for three consecutive years at the same company.
If you fall into this category, it’s wise to seek guidance on how to approach this new investment opportunity to ensure you’re setting yourself up well for the future.
Recent graduates and young adults
Those who have recently graduated from college or a graduate school program are now allowed to use up to $10,000 of their 529 college savings plan to repay student loans. This offers great flexibility for repayment options and allows recent graduates to avoid paying thousands of dollars of interest down the road.
Additionally, within one year of the birth or adoption of a child, each parent can take up to $5,000 out of a 401(k) or IRA account. While taxes may apply to the distribution, it is penalty-free and may be re-contributed to the account at some point down the road.
Retirees and heirs
Prior to the bill, individuals were required to begin taking withdrawals from their IRAs at 70.5 years old. Now, retirees don’t have to touch their accounts until age 72. This is good news for investors who don’t need the money immediately after they turn 70. (The new legislation applies to those who had not turned 70.5 at the end of 2019). This component of the bill protects investments long term and helps ensure that you won’t outlive your savings.
Changes to the information provided on quarterly 401(k) statements will bring greater peace of mind to investors. Those who have already retired or are approaching retirement will be able to see what their income stream looks like month-to-month based on their account balance. The Department of Labor still has some work to do to establish how this info will be delivered, but the increased transparency will aid in long-term financial planning for many investors.
As for individuals who have inherited retirement accounts, such as 401(k)s and IRAs — they must empty and pay taxes on them within 10 years. The new legislation removes the ability to stretch withdrawals over a lifetime. Certain beneficiaries will remain exempt, including spouses and minor children.
The result of this legislation creates the likely possibility that your current and future investments will need some extra attention. If you’re still unsure of how these new laws affect you personally, it’s wise to seek the expertise of a professional financial advisor. Making plans for your future helps ensure that your family and business investments will be set up for success for years to come.
This column originally appeared in the Memphis Business Journal.