They say that occasionally, the powers that be in Washington get together and move meaningful legislation forward. For the retirement planning business, December was one of those months that saw meaningful change that will have an impact on many of our clients. Here is what you need to know about the SECURE act:
Before digging into the changes that will occur for retirement savers, let’s look at what the purpose of the bill is. In summary, the bill’s primary aim is to make retirement savings easier. While the bill may pave to way to helping people save more going forward, it will not solve the primary issue that retirees face in America, which is a shortage of retirement savings already in the bank. Here are a few of the highlights of what will change:
Your RMDs (required minimum distributions) will start at age 72 instead of 70 ½ years of age.
• Your RMD is the IRS’s way of recouping some tax revenue by making you take withdrawals from your IRA or 401(k) account, which have grown tax deferred while invested in those plans. This is good news for people that do not need the money from their IRA because it will allow it to grow tax deferred for a little bit longer. This will only apply to individuals that turn 70 ½ after January 1st of 2020.
You will be allowed to contribute to your Traditional IRA after age 70 ½.
• Currently, individuals are not allowed to contribute to their traditional IRA after the age of 70 1/2, but going forward, that will change. Assuming that you have “earned” income, you will be allowed to contribute to your Traditional IRA indefinitely, which is a great thing for the growing number of people that are staying in the workforce past the age of 70.
If you have an inherited IRA, you will have to pay taxes on it sooner.
• This portion of the bill will basically eliminate what is currently referred to as the “Stretch IRA”. Currently, when an IRA owner passes away, the beneficiary can stretch the RMD’s over their lifetime, which can lead to the IRS taking decades to recoup the taxes on the tax deferred IRA. The SECURE act will now require a beneficiary to drain the inherited IRA over a 10 period, which will accelerate the ability for the IRS to recoup the taxes that are due on the IRA. This will only effect individuals that inherit money after January 1st, 2020.
Many 401(k)’s may see a new annuity option.
• An annuity, in its most basic form, is taking a lump sum of money and turning it into a lifetime income stream. While many retirement savers are good at throwing money into their 401(k), most of them do not know how that contribution will translate into an income stream for them once they retire or how much that income stream will be each year. In the past, most employers were hesitant to put an annuity option into a 401(k) for fear that they could be held liable if the insurance company did not make good on paying out the annuity. The SECURE act is providing some additional protections for plan sponsors that will encourage them to add an annuity option to their plan.
If you work for a small business or you are a part-time worker, you may have a 401(k) for the first time.
• 401(k) plans can be costly and time consuming to administer. This has made many small businesses shy away from providing a plan for their employees. The SECURE act will encourage many small businesses to offer a plan by allowing small businesses to join and offer the same plan to employees of multiple companies, which will reduce the cost and create economies of scale. Lastly, the law requires employers who offer a 401(k) to offer it to any employee that works 500 hours for 3 straight years or 1000 hours for one year.
Again, there is more to this bill than what is written here, but think of this as a highlight reel of what we at Metcalf Partners Wealth Management believe to be the most meaningful change that will come out of the SECURE act. As always, if you or anyone else that you know might need help navigating this bill or just need to sit down with a financial advisor to get your own plan and investments in order, do not hesitate to visit our website and set a complimentary consultation.
This material was created for educational and informational purposes only and is not intended for ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.