How your IRA, 401(k), and other saving plans are affected by the SECURE Act
Since Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December, there have been a lot of questions about what the reform bill actually covers. What age do you take required minimum withdrawals (RMDs)? What do you do when you’ve inherited a stretch Individual Retirement Account (IRA)?
The SECURE Act, seen as one of the most significant U.S. retirement system overhauls since 2006’s Pension Protection Act, outlines a slew of provisions financial advisors like me are evaluating. It is a bipartisan bill designed to aid Americans’ ability to save for retirement.
For this blog post, I’m going to explore a handful that I think will be of keen interest to Bull Oak Capital clients. One involves how much more time retirement savings can grow tax-deferred. Another significantly affects IRA inheritance. Other key changes allow 401(k) plans to add annuities as a plan option, expand allowable uses for 529 Plans, and offer part-time workers the ability to participate in their employers’ defined-contribution (DC) plans. Be sure to read more about all of the SECURE Act changes.
The SECURE Act is vital because it’s intended to boost retirement savings opportunities since many people tend to work later and live longer. Even people with a solid financial plan in place may still find it hard to balance their retirement savings goals when other pressing responsibilities are on the table like housing, raising a family, paying off student debt, or launching a business.
That being said, here are some new considerations from the SECURE Act to take into account:
Tender Age of 72
The SECURE Act raises the age at which RMDs must begin. Previously, retirement account holders were required to take RMDs the year they turn 70 ½. The rule was first applied in the early 1960s. So, tweaking the age is viewed as a necessary step to account for Americans’ longer lifespans.
Now, beginning in 2020, the RMD age has been pushed out to age 72. Although, anyone who turned 70 ½ last year must follow the rules in effect before the SECURE Act’s approval.
The updated RMD age carries implications for both retirement and tax planning, depending on your circumstances. Those could include how much longer you plan to work, expected retirement income, and investing goals.
Another provision to be aware of: the SECURE Act removes any age limits on contributions to traditional IRAs, provided you have earned income. This is an important win for retirement investors because it allows tax-deferred earnings to continue growing over time before RMDs kick in.
By No Stretch
The SECURE Act does away with the so-called stretch IRA. Previous rules held that when you die and still had money in your retirement account, the assets could be dispersed over the life of your beneficiary. Since a recipient could be much younger than the deceased, he or she could “stretch” the distribution receipt timeframe, thereby enjoying tax-favored earnings accumulation.
The SECURE Act now requires retirement savings accounts to be distributed within 10 years of the account holder’s death, subject to certain exceptions. For IRA holders, there are limited ways around this requirement. Some of the planning falls on the inherited IRA recipient as they are allowed to distribute the money evenly over 10 years, or however else they see fit.
For example, consider a 25-year-old grandson that inherits a $1 million IRA from a relative. He could take a $100,000 distribution each year for 10 years, or spread the income out at his discretion as part of his own income tax situation.
However, there are 5 situations where the 10-year rule won’t apply to a designated beneficiary. Members of this group are called “Eligible Beneficiaries.” These are:
- Surviving Spouse
- Chronically ill
- Not more than 10 years younger than owner
- Minor children
Know that these rules only apply to beneficiaries who inherit after 2019. Those that inherited can beforehand (existing beneficiaries) can continue to stretch.
Employers offering 401(k) plans — as a matter of liability — have generally been reluctant to offer annuities, which are investment plans that can provide set payouts in retirement. But the SECURE Act now provides employers a safe harbor, making it easier for companies to include annuities among employees’ 401(k) investing options.
This added investing option is one more way in which retirement investors are getting some added flexibility in their portfolios. But it’s important to remember that annuities are complex investment products, can come in many varieties, and carry different fees.
Brush Up on Education Savings
529 Plans, named after Section 529 of the Internal Revenue Code, were added more than 20 years ago and have proven an important vehicle to sock away money for higher education while also benefiting from several tax benefits and other advantages.
SECURE Act provisions make 529 Plans even more impactful. The legislation expands the allowable uses for 529 Plan education savings accounts, to now cover costs for registered apprenticeships, homeschooling, as well as private elementary, secondary, or religious schools.
Also, the SECURE Act allows parents to pay off student loans, up to $10,000, from a 529 savings account as part of qualified expenses. So a family that’s paid college expenses and still has money in the account may want to consider using those reserves to chip away at the loan.
Previously, employers could exclude part-time employees (those working less than 1,000 hours per year) when providing a defined contribution plan to their staff. In general, women are more likely than men to work part-time, so the situation was especially tricky for women’s retirement planning, according to the legislation.
Now, the SECURE Act requires employers that offer 401(k) plans to allow long-term, part-time workers to participate in their workplace plans, under certain conditions. Workers can enroll in their company plan if they have worked for at least three consecutive years (500 hours per year) and/or one year of service (logging 1,000 hours). For some households, this represents another significant retirement investing opportunity.
So if you work part-time and haven’t had the opportunity to invest in a 401(k), now is an excellent time to ask your employer about the potential for enrollment.
Changes outlined above are just a snapshot of what the SECURE Act does overall. After reading this blog, it may trigger questions about your retirement plans and investing strategy. Should I adjust my retirement savings plan? Should I change my investment allocation or strategy? Does it make sense to do a Roth IRA conversion?
I am ready to discuss these critical questions, give more information, to help you think through your options. As always, having a well-defined financial plan in place will help avert risks and contribute to your retirement confidence overall.