Perspective | A new law brings big changes for pensioners, especially parents

<pre><pre>Perspective | A new law brings big changes for pensioners, especially parents

"The bill includes a number of key reforms to address the country's pension crisis," said a Senate Finance Committee statement that lists Democrat Ron Wyden (Ore.). “As Americans delay retirement and increasingly work part-time, these changes can continue to save workers. Although we need to do more to ensure the financial security of older Americans, passing this law is an important step. "

A provision would allow parents to deduct up to $ 5,000 for each new child from their individual 401 (k) or similar work plans without incurring an additional 10 percent tax on early retirement plans. However, you still have to pay normal income taxes on the benefit, which must be paid within a year of the birth or adoption of a child. Parents can later pay the money back into their pension account.

Often people do not save for retirement because they have difficulty covering their expenses, e.g. B. the cost of caring for a child. As a result, they do not want to tie money into a retirement account due to payment restrictions and penalties.

Aron Szapiro, Director of Policy Research at Morningstar, is aware that families may be short of money, but is concerned about adding exceptions that allow people to withdraw funds for retirement. There is already a hardship exception, which enables employees to switch to their pension account for certain financial emergencies, such as preventing eviction. Plan participants can also take money to buy their own home or to pay for their tuition.

"In my opinion, we should strive for a pension system, not a general savings system," said Szapiro. “There are many ways for money to leave the pension system for non-pension purposes. I am sure that this will help people, but there are too many pension leaks. "

If you believe that a hardship case is necessary, consider that a 10 percent prepayment penalty is due for those under 59½ years of age. In addition, non-Roth withdrawals are subject to federal income tax and, in some cases, state income tax.

The Secure Act would also allow savers of a 529 college savings plan to use up to $ 10,000 in student loan repayments.

Here are some of the other important provisions.

– Increases the age from which a required minimum distribution (RMD) must start from 70 ½ to 72 ½. Currently, people who reach 70½ must obtain RMDs from their individual retirement accounts (IRAs) and company pension plans. Just a note, the new rule applies to people who turn 70 1/2 years old after December 31. This rule will likely benefit wealthier seniors. However, it is a welcome relief for pension savers who need to withdraw money that they may not need. Readers have often complained to me about RMDs, including their fear of the enormous penalty for failing to withdraw the correct amount.

– Abolition of the maximum age for traditional IRA contributions currently 70 ½. From this age, workers can contribute to their IRA.

– Multiple employer regulations allow independent small employers to partner with other companies to draw up 401 (k) plans. Many small employers do not offer company pension plans due to the administrative burden and inability to receive reduced fees from the plan administrators. With fewer employees than with large companies, they often do not have the leverage to negotiate a better price deal for their employees.

"I think the multi-employer plans are likely to be the most transformative," said Szapiro. "It will likely encourage small employers to offer plans if they don't or if they otherwise would have offered simple IRAs, rather than plans with a match or more ways to contribute."

Aside from collective agreements, employers must cover long-term, part-time workers in their 401 (k) plans from 2021 onwards, the Society for Human Resource Management, which has a very useful body, highlights any changes under the new law. Employees must be 21 or older and work at least 500 hours a year for at least three consecutive years.

– Limitation of statutory liability under a Safe Harbor rule for companies that offer pensions in their company pension plans. This part of the law has been criticized by some consumer representatives. On the one hand, many workers want to turn their savings into a guaranteed income stream so they don't survive their money. One possible way to do this is through an annuity that is sold by insurers. But pensions have a disadvantage.

Companies may hesitate to offer contracts with guaranteed pension income because they fear employers will sue them if the insurer later gets into financial difficulties.

"Our view of the safe haven for pensions is that there is almost no adequate safeguard," said Barbara Roper, director of investor protection at the Consumer Federation of America.

Roper said there are also concerns that smaller 401 (k) packages could offer costly pensions that are profitable for the insurer but not so cheap for the pensioner.

– You need earned income to contribute to a traditional IRA or Roth IRA. Scholarships and non-study grants were not treated as compensation. A change in the rules now enables doctoral and post-doctoral students to use this income as the basis for IRA contributions.

There's a lot to unzip in this new law, so I'll write more about it in 2020.

"The defined contribution system has been a great success and has helped individuals prepare for retirement, and the Security Act has brought a number of really significant improvements, particularly by increasing savings for individuals," said Elena Barone Chism, Associate General Counsel, Retirement Policy for the Investment Company Institute.

Readers' question of the week

Q: Fundamentals of investing: I am confused about low cost index funds. Can it also be an IRA? Do you choose mutual funds as IRA funds? Or do you buy an IRA with preselected funds and then, if you like, put money separately into the different funds?

Maria Bruno, director of US wealth planning research at Vanguard Investments: An IRA is a tax-protected pension account. You have the flexibility to choose your financial institution and the actual investments. Basically, it is a three-stage process. The first step is to choose between a traditional IRA or a Roth IRA. The second step is to choose your investment provider / custodian. The third step is to choose your investments from those offered by the investment company. These can be investment funds, exchange traded funds or individual issues. You have a lot of flexibility and you can easily do all of this online. Index funds are a great option as they are diversified, low-cost options.

Michelle Singletary: I like to imagine a traditional IRA, Roth or a 401 (k) or similar work plan as a pot. And you put various investments in this pot. This can be an inexpensive index mutual fund or individual stocks and bonds. You can decide how to invest the money based on a number of factors. Regardless of which investment plan you choose, it is important to note that the earlier you start investing, the more time you will have. With the right combination of financial steps, you can become a 401 (k) millionaire.

Retired rants and raves

Question of the week: What do you think of the changes that result from the Secure Act?

I am also interested in your experience or concerns about retirement or aging. You can rave or rave. Send your comments to, Please enter your name, city and state. Enter "Retirement Rituals and Raves" in the subject line.

In last week's newsletter, I asked people about their experience of getting their social security declarations. People had a lot to say.

Julie Robinson from Fort Wayne, Indiana wrote“My mother tried to set up online social security access with my help, but was frustrated because she didn't have credit card information. She always paid cash for everything, including cars, because she thought this was smart and prudent behavior. Your mortgage loan was repaid too many years ago to be relevant. We called the social welfare office and finally got through to a person who told us that they had to come to the office with lots of ID. She was 82 years old at the time, had given up driving and wasn't sure where all these papers were since she'd just moved. She decided not to worry about it. Wondering how many other seniors had similar barriers? "

"Another problem is not receiving these paper statements if we receive the spouse benefit while allowing our own benefits to accrue," he wrote Betty Siegel from Silver Spring, MD, “For some reason, once you start collecting spouse benefits, you will no longer be able to access your bank statements online to see what your own benefits will be at a later time, so you will not be able to track them yourself , And when I call the SS hotline, the estimated numbers that are given to me are very different – depending on the representative I get on the phone and who does his own calculations. I shouldn't have to rely on the math skills of the representative I have on the phone to get these numbers! "

Norm Ishimoto from San Francisco wrote: “I recently received an email from SSA reminding me to search with my online account. After many attempts, I was unable to go through the login page. I had to make a call and was informed that a new temporary password would be sent to me. It has not arrived yet. In this case, I have no idea why the social security authority locked me out. My wife doesn't have this problem and we retired at about the same time. I am divided in my assessment whether one approach is better than the other. If I just want to have a bank statement at a certain time of year, getting a postal statement is better than an unreliable (and hackable) email or online system. "