Signed into law at the end of 2019, the SECURE Act poses potentially significant changes to most Americans’ plans for retirement and estate planning documents. SECURE stands for Setting Every Community Up for Retirement Enhancement, and it went into effect on January 1st, 2020. The goal of the bill was to address what some are considering to be a national retirement crisis.
Today, private company pensions are few and far between, meaning that most Americans must plan to fund their retirement income themselves through savings and Social Security benefits. The intent behind the SECURE Act is to encourage people to save more while they’re still working, spend their retirement savings during their lifetime, and leave less to their beneficiaries after they pass.
Here are some of the changes that might affect your financial and estate plan:
- IRAs
Previously, IRA contributions were not allowed past age 70½, the age that required minimum distributions (RMDs) began, but the Act removed age restrictions for contributions. Now, as long as you keep working (ie: have earned income), you can continue putting money into an IRA. And speaking of age 70½, required minimum distributions for IRAs and pre-tax retirement plans are now set to begin at age 72. The logic behind this is that Americans are living longer than they did in the 1960s when the RMD age was established, so they will need to maximize the tax-free growth of their savings for as long as possible.
One of the most surprising parts of the Act is the elimination of stretch provisions. A stretch provision took effect when a non-spouse beneficiary inherited an IRA or a 401(k) and was able to “stretch” the tax-free growth of the account and RMDs out over their own expected lifetime. Now beneficiaries will have to withdraw all funds from their Inherited IRA within ten years. This will potentially impact the beneficiary’s tax liability in a significant way, especially if they are still working. Any funds withdrawn from an IRA are taxed as regular income, which could be especially problematic for those who are in the height of their careers. The ten year requirement will not apply to spouses, minor children, or beneficiaries who are not more than ten years younger than the deceased. With this in mind, you may want to review the beneficiaries on your accounts and update them if needed.
Inherited Roth IRAs are also subject to RMDs and the new ten year rule, but since the money contributed to these accounts is post-tax, it will not affect the beneficiary’s tax liability.
- Employer Sponsored Retirement Plans
The Act removes employer discretion when it comes to allowing long-term, part-time workers to participate in employer-sponsored retirement plans. As long as someone works 1,000 hours for a full year or 500 hours for at least three consecutive years, they are eligible to join the plan.
Previously, annuities haven’t been a common investment option for 401(k) plans because the burden fell on employers to ensure that all investment products in the plan were appropriate for their employees and annuities are typically complicated products. This is changing with the SECURE Act and, instead of the employer carrying the burden, insurance companies will now be responsible for offering suitable options, and employers won’t be held liable if an insurer fails to provide a steady stream of income or pay claims. Regardless, this is a win for the insurance and annuity industries who lobbied extensively to have their interests written into the Act. Critics say that annuities in 401(k) plans aren’t a good thing because of their high fees, complex fine print, and potential penalties. Annuities can be useful in certain situations, but it’s important to take the time to understand how they work and if they are truly a good fit within the broader context of your financial plan.
These are just a few of the changes brought on by the implementation of the SECURE Act and there are many more new provisions that may be relevant to your financial life. As with the passing of any new tax and retirement laws, it’s worthwhile to consult with your CPA, financial advisor, and/or lawyer to ensure that you receive advice specific to your personal financial circumstances and estate planning needs.
