We will be going over the SECURE Act in 5 minutes. This does not encompass everything the SECURE Act touches on but is rather a summary of some of the important points.
In December of 2019, the SECURE Act, or Setting Every Community Up for Retirement Enhancement Act was signed into law. Though this is one of the biggest pieces of retirement plan legislation we've seen in a long time, it has been overshadowed by 2020. There has been a lot going on, needless to say.
It may be a while before we get back to any sense of normalcy that we saw before the pandemic but it's a great time for us to take a step back and remember some of the highlights of the SECURE Act.
First off, let's talk about small businesses and 401 K's. Many small businesses shy away from offering employer-sponsored retirement accounts because they can be expensive and challenging to administer. The SECURE Act has tweaked many of these rules related to these tax-advantaged accounts, to help offer incentives and make it easier for small employers to offer them.
Let's talk about part-time employees and how they're affected by this bill. With the passing of this bill, businesses are able to broaden the scope of those eligible by offering 401k to part-time employees who have three consecutive years if 500 plus hours worked.
There's not a lot of opportunities to pull out my penalty-free when it comes to 401k. One of the things that this bill has introduced is the ability for investors to withdraw up to $5,000 from their 401k penalty-free to help with some of the expenses of having or adopting a child.
There's a provision in SECURE Act that makes it easier for employers to offer annuities in a 401k plan. On the one hand, participants may use this for long term income objectives, when they retire. On the other hand, like any other investment, participants really need to dig deep and make sure that it will provide what they are looking for, and the fees associated with it actually make sense for their individual objectives.
If you're familiar with 401ks, you may be familiar with required minimum distributions, or the amount of money that you're required to withdraw from your retirement plans once you reach a certain age. The required minimum distributions age has been 70 1/2 for a long time. Why they have the 1/2, I have no idea. Personally, I haven't talked about my age in halves since I was in grade school. The required minimum distribution age has been pushed from 70 1/2 to 72. This will allow retirement funds to grow a little longer and eliminate the tax burden on investors for another one and a half years.
One of the big changes this bill had on the personal side is the elimination of the stretch IRA provision. The Stretch IRA provision of the past allowed non-spousal beneficiaries to gradually spread out the account distributions over the course of their lifetimes. However, the SECURE Act now requires all non-spousal beneficiaries of IRAs to take a full payout from their inherited IRA 10 years of the death original account holder. This can be a big impact on beneficiaries, given the tax burden, the distributions can cause.
The last takeaway of today is 529 Flexibility. The SECURE Act allows investors to make 10,000 a year student in student loan repayment, using money in a tax-advantaged 529 account.. This allows parents who have money remaining in the confines of shelter has already graduated.
Now we have just skimmed the surface on some of the major points of the SECURE Act. Here are a few takeaways. If you are a small business and you don't have a 401k, you may want to take a look at the tax incentives to see if it makes sense for you to start with one. If you do have a 401k. This is a great time to review it. Review the plan documents. Review the plan design. Talk to your professionals to see how this impacts you and your business. This is also a great time to put together some education meetings surrounding financial wellness and the impact these new changes will make on the individuals in your company.
As always, our intention is to provide meaningful education for you to plan sponsors in five minutes or less. If you have questions, if you need a second opinion, please reach out to us we're happy to help. If you have other education topics you'd like us to cover, please reach out to us. We have ongoing education material for 401k plans in our podcast on our website. We have a blog, and we also have other episodes of five-minute fiduciary. Thanks for joining. We'll see you next time.