It’s happened. After a nearly unanimous passage in the U.S. House of Representatives, the SECURE Act (Setting Up Every Community for Retirement Enhancement Act) finally made its way through Congress. The legislation was “attached” to a bipartisan spending bill in the Senate with the goal of avoiding another government shutdown.
The president signed the SECURE Act into law on December 20th, 2019. With many provisions having gone into effect on January 1st, 2020, it will have big implications for retirement and taxes. As a result, retirees and working-age retirement savers can start seeing major changes as early as 2020.
All of that being said, the SECURE Act brings the most sweeping changes to the U.S. retirement system in a decade. Because of that, there is bound to be some confusion about what the act actually does and how it might affect people’s own retirement standard of living.
Here is a broad overview of some major changes to retirement, taxes, and financial planning that come with the SECURE Act now becoming law.
Stretch IRAs Effectively Go Away
The ‘stretch IRA’ has effectively come to an end, thanks to the SECURE Act’s new provisions. The old stretch provisions for most non-spouse inheritors of a 401(k) plan or another defined-contribution plan have also gone away. Now the stretch provisions have been replaced with a new 10-year rule.
Under tax law before the SECURE Act, an IRA owner could leave their retirement assets to a non-spouse beneficiary. Then the beneficiary could stretch out the payments they received from the IRA over their life expectancy.
However, the SECURE Act limits the withdrawal period to 10 years for most non-spouse beneficiaries. This could effectively leave the retirement planning of tens of thousands of beneficiaries who are drawing on lifetime payments from inherited IRAs in disarray. Spousal beneficiaries aren’t expected to really be affected by the change, including in any survivorship plans.
Before this legislation, many trusts were written as “pass-through” trusts. The language of these trusts was written in a way that took advantage of more ‘generous’ tax rules than the SECURE Act, with its new language, now permits.
These pass-through trusts will have to have their language reformed to match up with the new language of the act. If not, access could be limited to trust heirs who are spelled out as beneficiaries of the IRAs. The tax bills could be huge for these families down the line. This could push the heirs into much higher tax brackets than usual.
There are many changes that create case-by-case situations for tax planning with IRAs. Do you have any questions or concerns about how these might affect you? We recommend that you check with your CPA or tax advisor about your personal situation.
Reform to Required Minimum Distributions and IRA Contributions
The SECURE Act would also push out the age at which required minimum distributions apply. Instead of age 70.5, the act would bump up the starting age for RMDs to 72. This assumes that a retiree didn’t turn 70.5 in 2019 (the 70.5 age rule would still apply to them).
According to an article by Jeff Levine, an associate of the well-regarded financial advisor Michael Kitces, this change will largely be minimal in its impact. Around 20% of retirees take out the amount that they are required to withdraw, says Levine. The remaining 80% of retirees already withdraw more than the at-minimum amounts set by required minimum distributions.
Currently, you are allowed to keep contributing to a Roth IRA even if you are past age 70.5. The SECURE Act would widen the field for retirement saving for those who continue working in their 70s. It would allow those who are 70.5 years old and beyond to keep contributing to their traditional IRAs.
Expanded Options for More People to Save for Retirement
Under the SECURE Act, small businesses will have more incentive to band together and offer a 401(k) plan to their employees.
The legislation will provide small business employers with the option to offer a 401(k) plan with other small businesses. What’s more, it will be at less cost and with less fiduciary liability concern than currently exists now.
The goal? To start offering more employees in the small-business employment landscape increased options for retirement savings. This would give them a greater capacity to save for retirement beyond the individual responsibility they already shoulder.
Many part-time employees may also become eligible to participate in 401(k) plans. To be eligible, they have to have worked for the employer for at least 500 hours for three consecutive years and be at least 21 years old, according to HR organization SHRM.
Increased Choices for Lifetime Income and Savings
The SECURE Act would give more choices for lifetime retirement income inside 401(k) plans to plan participants. Currently very few 401(k) plans offer any annuity selections at all for lifetime income.
New provisions within the SECURE Act would help reduce the barriers to including annuities in plans. As a result, 401(k) plans can offer mature-age and retirement-age employees more choices for maximizing their lifetime income.
In turn, this can help people relieve some of the strain on their portfolios for generating sustainable retirement income.
The SECURE Act will also reward employers with a $500 credit for opening up a 401(k) or SIMPLE IRA plan with automatic enrollment. It will also allow employers with safe harbor plans to raise the automatic enrollment level from 10% of employee wages to 15%.
More Flexibility for Paying Off Student Loans
The act is also good news for college graduates. They can now withdraw $10,000 a year from their 529 plans to pay for student loans. The withdrawals will enjoy favorable tax treatment.
Increased Reporting on Lifetime Retirement Income
Thanks to the SECURE Act, retirement savers will have increased reporting on how much lifetime income they can receive. Now 401(k) plans and other defined-contribution plans will have to give their participants a “lifetime income disclosure” every 12 months.
This would let people know about how much lifetime income they might expect from their lump-sum account balance at that moment in time. It could make the process of saving and planning for retirement easier over the years.
More Financial Flexibility for Growing Families
The SECURE Act also gives new provisions offering more financial flexibility to new parents.
New parents can withdraw up to $5,000 from one of their retirement accounts to pay for expenses that they incur from having a newborn or adopting a child. This type of withdrawal will be taxable, but it won’t incur the standard 10% early withdrawal penalty.
The Great Need for Major Retirement Reform
There are varying accounts on the topic of how many people actually participate in a retirement plan. Some statistics report that about 63% of full-time American workers currently participate in an employer-sponsored retirement plan or have a spouse who does.
Other studies indicate that the real participation rate may be closer to 40%. Still, even the higher number leaves one-third of all Americans without a retirement plan.
The U.S. Bureau of Labor Statistics estimates that about 55% of workers are contributing to their retirement plans. On the other hand, investment companies such as Vanguard estimate that many people are woefully behind in their savings plans.
They said that the median retirement plan balance for the average 401(k) participant over age 65 is just a little over $58,000.
SECURE Act Creates New Opportunities for Retirees and Savers
The Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act) passed the House by a 417-3 vote in late May of 2019. Now it’s passed the Senate as part of the omnibus spending bill and has been signed into law by the president.
Lawmakers on both sides of the aisle have praised the legislation for much-needed changes it helps bring. And, in many ways, it’s just a start.
“With [the] passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Congressman Richard E. Neal said in a statement after the bill passed.
While more work remains to be done, this is a good first stepping stone for retirees and working-age investors. Time will tell as to what other changes might await retirement investors in the future. But no matter what, there is no substitute for the peace of mind that comes from planning for your retirement future yourself.
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