At this point in your life, you probably worry more about paying back student loans than you do saving for retirement. However, the days of retiring to a Florida beach — or wherever floats your boat — aren’t as far off as they seem.
Retirement tends to creep up on you, which is why you need to understand important legislation that will affect how you can spend your newfound freedom. The most recent law you should know? Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act.
The Financial Woes of Being a Woman
Let’s talk financial turkey before getting into the SECURE Act's nuts and bolts.
Would it surprise you to learn that about 40% of women have no fiscal roadmap to help them stay afloat if they outlive their savings? It’s a scary statistic, especially when you consider most women will live to be 81. That’s five years longer than men, and it means that we’ll need more of a nest egg to cover a lifetime of bills.
Women have another issue to consider when building and saving capital: They generally pay way more in healthcare than men do — mainly due to reproductive health-related needs and conditions (thanks, Mother Nature).
These are serious realities for women everywhere, and that's why the SECURE Act retirement bill is crucial to understand. So, what even is the SECURE Act?
The SECURE Act Summary
The SECURE Act passed on Jan. 1, 2020 to address some big problems: A whopping 1 in 3 Americans close to retirement have less than $25,000 in savings! That's less than I made in my first salaried job. Even scarier? About 1 in 5 don't have any savings at all! If Millennial and Gen Zers follow suit, the country will fall into an economic crisis.
So how does the SECURE Act affect you? More than anything else, it pushes back the age when you must take required minimum distributions, or RMDs, from 70 1/2 to 72. This delay helps you avoid taking money out of your taxable IRAs and 401(k)s too early. At the same time, the investments have a tad more time to accrue.
This is a benefit, but it’s only one of the ways the SECURE Act retirement bill may affect you at a certain point in your life. Here's how the SECURE Act will impact you in five other life situations:
1. The woman who owns her own business.
I have the greatest respect for boss women who take the leap as entrepreneurs and founders. At the same time, I understand why they don’t offer employees retirement plans, particularly if they run small operations.
An attractive aspect of the SECURE Act is that starting on Jan. 1, 2021, businesses can open multiple employer plans (MEPs), aka pooled employer plans (PEPs). This should encourage more small business owners to create retirement plans without the worry of getting bogged down with cumbersome, expensive costs and administrative burdens. There's also a nice tax credit — up to $5,000 per year for three years — for employers who decide to start a retirement plan.
2. The woman who has kids.
Even though my son can be whiny at times (what two-year-old isn't?) and certainly demands a lot of energy and attention, he's truly the light of my life. But goodness, having a baby can put a big dent in your bank account — even more so if you adopt.
The SECURE Act gives moms the opportunity to withdraw up to $5,000 from retirement accounts without incurring the usual 10% penalty — as long as the withdrawal takes place within a year of the child being born or adopted. Of course, that money must be used to cover applicable parenting expenses, not on treating yourself to a much-needed massage. Though taxes apply to the withdrawal, avoiding a hefty penalty for taking out dollars early is a much-welcome advantage for cash-strapped mothers.
3. The woman who works part-time.
As I mentioned, I love being a mom, and I get how tough it can be to decide whether to work or stay home with your kids. Many women choose both, earning a part-time paycheck while they care for their children. Of course, women who don't have kids may experience this too if they decide to take care of an ailing or aging relative.
In the past, employers have followed the 1,000-hour rule when it came to workplace retirement plans. If an employee worked less than 1,000 hours a year (or about 19.2 hours per week), they weren't allowed to tap into the company’s plan. Since the SECURE Act passed, you can be included in the retirement plan if you work 1,000 or more hours or if you worked at least 500 hours per year for three years in a row. However, this provision won't come into play until 2021.
4. The woman who works past age 70.
It's a sad fact that women make less than men. To combat this, many women are staying in the workforce well past the typical retirement age. As we learned earlier, the SECURE Act retirement bill moved the age where you have to take RMDs to 72. In addition, the bill removed the restriction on contributing to IRAs after age 70 1/2. It’s a win (hello, tax advantages) for female phenoms who just aren’t ready to fully exit a job, or who want to try something new as a part-time team member.
5. The woman who inherits an IRA from a non-spouse.
You knew this legislation wouldn't be all roses. So, what's the SECURE Act pitfall that troubles women most? It relates to IRAs inherited from relatives, such as your parents. Prior to when the SECURE Act passed, women could spread withdrawals from these types of traditional IRAs or 401(k)s over a lifetime. This allowed them to manage the tax burden and enjoy the benefits.
As of January 2020, though, women in this situation have to withdraw the full amount of those accounts within a decade. For those in their prime earning years (good for you, girl), inheriting a 401(k) could leave you paying more in taxes due to a higher tax bracket.
The SECURE Act isn’t perfect — what piece of legislation ever is? But the pros far outweigh the cons, as long as you understand the new rules. If you haven’t begun investing in your twilight years, take this new piece of legislation as a push to do so. Future you will say thanks.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.