We’ve all noticed changes in our lives in the past twenty years. For example, we’re living longer and we’re working long past the age we used to associate with “retirement.”
We’re no longer working the standard 40 hours a week for one large company throughout our entire adult lives. We work remotely, with flextime, and change jobs every five years …and keep a side hustle going at the same time.
Our children leave college with student loans, facing financial barriers their parents never imagined.
Buy a dream home? Invest in the stock market? “Forget it,” a millennial sighs. “I’ll be paying for college till I’m sixty.”
Financial regulations haven’t caught up yet. They’re designed to protect people who dutifully work their 20+ years for a company that provides health care and pensions, then head off into retirement without looking back.
The gig economy? Freelancers and temp workers? You’d never know they exist when you review tax codes and employment laws.
Taking Regulation Into The 21st Century
Fortunately, we’re seeing a hint of good news. Congress seems to be waking up — at least a little. For instance, check out the SECURE Act, passed at the very end of 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement. But despite the name, SECURE goes way beyond retirement to influence a family’s financial planning.
Planning for Retirement
Up till now, the IRS assumed people weren’t likely to live much past 70. And they enacted laws that inadvertently encouraged taxpayers to die broke.
Starting at age 70-1/2, taxpayers were required to start withdrawing and paying taxes on a percentage of their IRAs. These dreaded withdrawals were know as Required Minimum Distributions or RMDs.
But today a hardworking taxpayer doesn’t see 70 as old. They might live another twenty years and they don’t want to disrupt their investments every year. SECURE offers a small but important change: you can now defer RMDs till you reach the age of 72. Not much longer – but a step in the right direction.
SECURE also takes a baby step to help people who keep working past 65 or skip retirement altogether. Up to now, you’d contribute to your retirement funds till you were 65. Then presumably you’d retire and dutifully enjoy the rewards of those funds.
For real? Not anymore. Thankfully, the SECURE Act just lifted all age limits on retirement contributions. Work through your 60s, 70s, and 80s and keep growing your retirement income. You might need it eventually.
Saving for Retirement With The New Way of Working
Full-time jobs used to mean just that: a single gig of 4 hours a week or more. But today, who’s counting? Freelancers and gig workers often piece together two or three part-time jobs to get a full-time income. So when we read that over half of American workers can’t collect retirement funds, why are we surprised?
The SECURE Act allows businesses to come together and create retirement options for employees by pooling their resources. The businesses don’t even need to be related. It’s a purely financial arrangement.
The Act also levels the playing field for people who work in small companies but think like big-company employees when they review their benefits. Take those automatic payroll deduction systems, for instance, to help employees save for retirement. Big companies take them for granted. Small businesses now have tax incentives to set them up – making it easier for more people to save for retirement.
Even better, your part-time gig might give you an entry into a 401 (k) plan. The rules used to require working over 1000 hours a year to qualify; now you can join for a much more manageable 500 hours over three consecutive years. Not perfect, but it’s a start.
Your next step? Talk to your own HR department to see how these new regulations affect your own retirement planning.
More Financial Freedom For Your Children
SECURE changes the game for families, from the time you first become a parent to the years your children are getting ready to enter the workforce. Up to now, you could draw funds from your retirement account only by paying a 10% penalty; exceptions included withdrawals for buying your first home, very large medical bills and mandatory alimony and child support.
SECURE allows you to withdraw up to $5000 from your 401 (K) retirement account, without penalty, to cover birth or adoption expenses. While your expenses will most likely be greater, this measure allows young families to reduce their level of debt at a time when they’re building careers and buying houses.
However, your financial planner will most likely urge you to use caution when making these withdrawals. When you withdraw funds from your retirement account, even without the penalty, you’ll still be paying taxes at the rate determined by your income. Additionally, $5000 invested in a growth fund — or even a CD with compounded interest — would grow quite a bit by the time you’re ready to retire. At 75, you could need that money as much as when you were 35.
As your children become college-bound teens, SECURE allows you to draw up to $10,000 for each child from your 529 college fund to repay loans.
At the same time, some young adults opt out of the college experience in favor of moving directly into trade apprenticeship programs. You can now use your 529 funds to pay for qualified apprenticeship programs; the Department of Labor even offers a website so you can check to see if your program will be covered.
Finally, if your child earns income from trusts or funds, the Secure Act just lowered his or her tax on that income. The Tax Cuts and Jobs Act of 2017 calculated the tax based on the rate applied to trusts and estates, which could be considerably higher than the rates on the parents’ income.
In particular, your children would pay higher taxes for taxable amounts of college grants and scholarships, as well as military survivor benefits. SECURE lowers the tax rate to the tax rates of the parents for tax years beginning after 2019, You may be able to file an amended return for your 2018 tax to claim amounts you paid in that year.
The SECURE Act won’t fit everyone’s financial needs and some financial planners say it should go even further. For instance, while you can withdraw $5000 to cover an adoption, the actual cost of an adoption averages $43,000, according to Adoptive Families Magazine.
However, some families will enjoy a significant, positive financial impact from SECURE. In particular, if you meet the criteria for part-time workers, you may be eligible to begin saving for retirement for the first time.
What matters is that we stay aware of changes in regulations that can affect us. We can take advantage of regulations that work in our favor, especially when we consider tax rates for ourselves and our children. We may feel more comfortable encouraging a child to choose an apprenticeship over college, knowing that we can apply funds from our 529 accounts.
Most important, when we review the SECURE Act, we realize that our world is changing. We need to take more responsibility for planning retirement and accepting financial responsibility associated with major life events. Working with a coach can help us take advantage of regulatory changes yet go beyond them to provide our own financial well-being.