The SECURE Act In the end of December 2019, Congress passed a funding resolution for the government which averted a shutdown. Within this continuing resolution passed a change which fundamentally alters the financial planning landscape, known as the SECURE Act. It was added late in the process, so many still aren’t quite sure exactly what’s in the legislation. The intentions of this law are generally noble--to help more employees fund their senior years with workplace retirement plans which allow participants to save more money than they would through a typical IRA alone. But it also provides some significant changes which individuals and planners alike are going to have to wade through in the coming years.
The remainder of this article will take you through some of the most significant changes. You should contact your planner and/or tax advisor to see how some of these changes will impact your plan.
1) No More Stretch IRAs for children and grandchildren
Before the SECURE Act’s enactment, non-spouse beneficiaries of an IRA could take the money out of an IRA over their lifetime. So, if you wanted to leave a portion of your IRA to a grandchild, that child could take that money over their lifetimes, allowing it to grow over decades. However, now all IRAs left to non-spouse beneficiaries, such as children and siblings must be taken over 10 years, unless they are within 10 years of age or are minors. While the assets can be left for the entire ten years, additional tax planning will be needed to determine how and when the best time to take distributions will be; particularly for mid- and late-career professionals (like you) who are in higher tax brackets. This also means that there will be significant changes in how people should plan to leave these assets to heirs. The intention of this provision is to be a revenue raiser for the government.
2) Age for Required Minimum Distributions now is 72
For those who have not yet turned 70 ½, the age where they will be required to take a minimum distribution from their IRA or 401k is now 72. The amounts required to be taken may be changed if the IRS changes their actuarial tables over the coming months.
3) No more maximum age for traditional IRA contributions
Before the SECURE Act, you could not make contributions to a traditional IRA after reaching age 70 ½. While 401(k), SEP IRA, and Roth IRA contributions were still allowed after reaching 70 1/2, traditional IRAs are now included with no maximum age.
In addition to these changes, there are several changes which may impact your workplace retirement plan, or even if you have one. Let’s look at a couple of these changes:
1) Annuities are now allowed in 401k plans
The SECURE Act will allow annuities as options into 401k plans for the first time. As with any sort of financial product, there are positives and negatives to this change. If these show up as options in your plan, work with your financial planner to understand what the product is and whether it is right for you.
2) Employers can now set up multi-employer 401k plans
Until now, employers could only set up retirement plans for their own business. However, this meant that small businesses often would not set up their own plans, as they can be costly and/or they were concerned about not being in compliance with DOL and IRS rules. Some businesses would sign up with Private Employer Organizations (PEOs) so that their employees can sign up with a plan (amongst other benefits), but now the 401k, which offers higher contribution limits than IRAs or SIMPLE plans, becomes a more attractive choice.
3) Automatic enrollment in 401k plans
Employers can now set up their plans to include automatic enrollment of new employees (opt-out vs opt-in). Employers will now get additional tax credits if they create this option. If new employees are automatically enrolled, it is likely that they will get started on their retirement savings sooner than they otherwise would. Studies show that fewer lower-compensated and younger employees enroll in retirement plans than higher compensated, older employees. It is thought that this will help many workers get started on saving for their retirement earlier, which increases compounding over an employee’s working life.
As you can see, many things have changed quite suddenly, and planners, individuals, employers, and employees have many things to consider as they delve deeper into the new landscape. Stay tuned to our blogs and newsletters as things become more clear.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.