The $1.4 trillion budget deal that just passed Congress includes substantial changes intended to help millions save more money for retirement and to give relief to people who need to tap those savings.
Tucked in the massive legislation to fund the federal government is the Secure Act, which stands for Setting Every Community Up for Retirement Enhancement. The law, supported by both political parties, includes provisions that focus on making it easier for people to fund their retirement with their own savings.
“The bill includes a number of important reforms to address the country’s retirement crisis,” Senate Finance Committee ranking Democrat Ron Wyden (Ore.) said in a statement. “With Americans delaying retirement and increasingly working part-time, these changes will allow workers to continue to save. While we must do more to ensure financial security for older Americans, passage of this bill is an important step.”
One provision would allow parents to withdraw up to $5,000 from their individual 401(k) or similar workplace plans for each new child without incurring a 10 percent additional tax for early retirement plan distributions. However, they will still have to pay ordinary income taxes on the withdrawal, which has to be done within a year of the birth or adoption of a child. Parents can later put the money back into their retirement accounts.
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Often people don’t save for retirement because they’re struggling to cover expenses, such as the costs of caring for a child. As a result, they don’t want to tie up money in a retirement account because of the withdrawal restrictions and penalties.
While understanding that families may be strapped for cash, Aron Szapiro, director of policy research at Morningstar, is concerned about adding exceptions that allow folks to withdraw funds intended for retirement. There is already a hardship withdrawal exception, which allows workers to dip into their retirement account for certain financial emergencies such as preventing an eviction. Plan participants can also take money out to buy a home or pay college expenses.
“My feeling is that we should strive to have a retirement savings system not a general saving system,” Szapiro said. “There are a lot of ways for money to exit the retirement system for non-retirement purposes. I’m sure this will help people but there are too many leaks from retirement savings.”
If you feel it’s necessary to take a hardship withdrawal, keep in mind that if you’re younger than 59½, there’s a 10 percent early withdrawal penalty. Additionally, non-Roth withdrawals are subject to federal income tax and, in some cases, state income tax.
The Secure Act will would also permit people saving in a 529 college savings plan to use up to $10,000 to pay off student loans.
Here are some of the other major provisions:
- Increases the age that a required minimum distribution (RMD) must start from 70½ to 72. Currently, people reaching 70½ must begin taking RMDs from their Individual Retirement Accounts (IRAs) and workplace retirement plans. Just a note, the new rule applies to people who turn 70 1/2 after Dec. 31. Although this rule will likely benefit more affluent seniors, it’s welcome relief for retirement savers who are required to withdraw funds they may not need. Readers have often complained to me about RMDs, including their fear of the huge penalty for failing to withdraw the correct amount.
- Repeals the maximum age for making traditional IRA contributions, which is currently 70½. Workers will now be able to contribute to their IRAs past this age.
- Under a multiple employer provision, unrelated small employers can join with other companies to establish 401(k) plans. Many small employers don’t offer workplace retirement plans because of the administrative expense and their inability to get reduced fees from plan administrators. With fewer employees than major companies, they often don’t have the leverage to negotiate a better deal on pricing for their workers.
- “I think the multiple employer plans are probably going to be the most transformative,” Szapiro said. “It will probably encourage small employers to offer plans when they otherwise wouldn’t or where they otherwise might have offered simple IRAs instead of plans with a match or more opportunities to contribute.”
- Except in the case of collectively bargained plans, employers will be required to cover long-term, part-time workers in their 401(k) plans starting in 2021, points out the Society for Human Resource Management, which has a very useful post about all the changes under the new law. Employees have to be 21 or older and work at least 500 hours per year for at least three consecutive years.
- Limits the legal liability under a “safe harbor” rule for companies that offer annuities in their workplace retirement plans. This part of the law has drawn criticism from some consumer advocates. On the one hand, many workers may want to convert their savings to a guaranteed stream of income so that they don’t outlive their money. One possible way to do that is through an annuity sold by insurers. But there is a downside to annuities.
Companies may be reluctant to offer “guaranteed retirement income contracts” for fear of being sued by employers if the insurer later gets into financial trouble.
“Our take on the annuities safe harbor is that it doesn’t include nearly enough safeguards,” said Barbara Roper, director of Investor Protection for the Consumer Federation of America.
Roper said there is also concern that smaller 401(k) plans might end up offering high-cost annuities that are profitable for the insurer but not such a good deal for the retirement saver.
- You need earned income to contribute to a traditional IRA or Roth IRA. Stipends and non-tuition fellowships were not treated as compensation. But a rule change will now allow graduate and postdoctoral students to use this income as the basis for IRA contributions.
There’s a lot to unpack in this new law so I’ll be writing more about it in 2020.
“The defined contribution system has been a great success and has really helped individuals prepare for retirement and the Secure Act makes a number of really significant improvements, particularly by increasing opportunities for individuals to save," said Elena Barone Chism, associate general counsel, retirement policy for the Investment Company Institute.
Reader Question of the Week
If you have a retirement question send it to colorofmoney@washpost.com. In the subject line put “Question of the Week.”
Q: Investing basics: I am confused about low-cost index funds. Does it have the option to also be an IRA? Do you pick mutual funds to be your IRA funds? Or do you buy an IRA with pre-selected funds, and then if you want, separately put money in the various funds?
Maria Bruno, Head of U.S. wealth planning research at Vanguard Investments: An IRA is a tax-sheltered retirement account. You have the flexibility to select your financial institution and the actual investments. Basically, it’s a three-step process. The first step is to decide between a Traditional IRA or Roth IRA. Second step is to pick your investment provider/custodian. Third step is to pick your investments among those offered by the investment company. It can be mutual funds, exchange-traded funds, or even individual issues. You have a lot of flexibility and all this can also be easily done online. Index funds are a great option, as they are diversified low-cost options.
Michelle Singletary: I like to think of a traditional IRA, Roth or a 401 (k) or similar workplace plan as a pot. And inside this pot you place various investments. It could be a low-cost index mutual fund or individual stocks and bonds. You get to decide how to invest the money based on a number of factors. But whatever investment pot you choose it’s important to note that the sooner you start investing the longer time you have for that money to grow. With the right combination of financial moves you can become a 401(k) millionaire.
Retirement Rants and Raves
Question of the Week: What do you think of the changes coming as a result of the Secure Act?
I’m also interested in your experiences or concerns about retirement or aging. You can rant or rave. Send your comments to colorofmoney@washpost.com. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
In last week’s newsletter I asked folks about their experience with getting their Social Security statements. People had a lot to say:
- Julie Robinson of Fort Wayne, Indiana wrote, “My mother tried, with my help, to set up online access for Social Security, but was foiled because she has no credit record. She has always paid cash for everything, including cars, thinking this was wise and prudent behavior. Her mortgage loan was paid off too many years ago to be relevant. We called the Social Security office, and eventually got through to a person who told us she would have to come to the office with lots of identification papers. She was 82 at the time, had given up driving, and wasn’t sure where all those papers were, since she had just moved. She decided not to bother. Wondering how many other seniors have had similar barriers?”
- “Another issue in not getting these paper statements applies to those of us who are collecting the spousal benefit while allowing our own benefit to accrue,” wrote Betty Siegel form Silver Spring, MD. “For some reason, once you start collecting the spousal benefit, you are no longer able to get access to your statements online to see what your own benefit is/will be at a later date, so you cannot track it for yourself. And when I call the SS hotline, the estimated figures I am given vary -- a lot -- depending on the representative I get on the phone, who does his/her own calculations. I should not have to depend on the math skills of the representative I get on the phone to get these figures!”
- Norm Ishimoto of San Francisco wrote, “I recently got an email from SSA reminding me to check with my online account. After many attempts I could not get past the sign-in page. I had to call on the phone, and was told I would be mailed (USPS) a new temp password. It has not arrived yet. In this instance, I have no idea why Social Security Administration locked me out. My wife does not have this problem and we retired about the same time. I am divided in my assessment if one access is better than the other. If I simply want to have a statement of my account at a significant time of the year, receiving a postal statement is better than an unreliable (and hackable) email or online system.”
Michelle Singletary writes the nationally syndicated personal finance column The Color of Money. Her award-winning column is syndicated by The Washington Post Writers Group and is carried in dozens of newspapers nationwide.
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