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New Law, New Options for Retirement Savings

SECURE Act erases previous age limit on contributions and more

a binder spine label says retirement plan - it sits on graphs and glasses on desk

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En español | Big changes are in store for finances in retirement, thanks to legislation that Congress passed in December. The SECURE Act (short for Setting Every Community Up for Retirement Enhancement) is the most important law affecting retirement since the Pension Protection Act of 2006 paved the way for automatic enrollment in 401(k)s.

The SECURE Act makes several changes in how workers and retirees can save and spend their retirement money, with provisions taking effect at different times. Here are powerful ways to take advantage of the SECURE Act, roughly in order of how soon you can employ them.

Changes in effect since January 1

Save more. You can now put money in a traditional tax-deferred individual retirement account (IRA) for as long as you are earning income, thanks to the elimination of the long-standing previous age limit of 70 1/2. So as long as you're still on the job, you can contribute as much as you earn, up to $7,000 — this year's IRS contribution limit for all workers 50 or older. A nonworking spouse who is 50 or older may contribute another $7,000, assuming the employed spouse's earnings match or exceed the couple's total contributions.

Withdraw less. If you're turning 70 1/2 this year, you won't have to take required minimum distributions (RMDs) from your IRA or your 401(k) from a former workplace, unlike before. Instead, you can wait until 72. If you turned 70 1/2 in 2019 or earlier, however, you're stuck: The old RMD rules still apply.

Rethink inherited IRAs. If you inherited an IRA before 2020 from a parent or other family member, you could stretch withdrawals out over your entire life, potentially maximizing untaxed growth. Now, starting with IRAs inherited in 2020, you must take all the money within 10 years unless the IRA was your spouse's or you fit other exceptions, such as if you're disabled. If it's a traditional IRA, withdrawals over that decade could mean relatively large tax bills. Roth IRA withdrawals are tax-free. So if the IRA you inherit is a Roth, you could let it grow tax-free for 10 years, then close the account. And if it's a traditional IRA, you could withdraw money in years when your earnings and tax rates are lower.

Plan for changes still to come

Count up your hours. Currently, your employer can exclude you from its 401(k) plan if you work less than 1,000 hours a year — roughly 20 hours a week. The new law lets you participate if you have worked at least 500 hours a year for three straight years, or if you have completed one 1,000-hour year on the job. This rule doesn't go into effect until next year, though, so if you're a part-timer, it could take a while to qualify.

Nudge your boss. Do you work for a small business? Starting next year, small companies will be able to band together to form 401(k) plans, and financial firms will likely offer plans that small companies can opt into. So lobby for your employer to join up. The government will give your boss a tax break for doing so, and you'll probably benefit, too, since research indicates that the more people there are in a 401(k) plan, the lower the expenses for employees.

Watch for new income options. The new law eases the way for employers to tuck annuities into 401(k) plans, letting you buy an income stream for life. An annuity isn't always the right choice, though, so get advice from a financial planner who doesn't make money from annuity or investment sales. “Do your homework on this,” says David Certner, legislative counsel for AARP, “especially since it is an irrevocable choice.”

Linda Stern, author of Living on Your Nest Egg, has been writing about finances since 1980.

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