With all the childishness and bickering in Washington, it’s hard to believe that anything can pass on a bipartisan basis. However, that is exactly what happened this week when Congress finally passed and sent to the President, legislation known as the SECURE Act. The President is expected to sign the legislation which will be the first major piece of legislation in over a decade that deals with how people save and handle their retirement. The SECURE Act which stands for setting every community up for retirement enhancement is mostly designed to make it easier for you and me to save for our retirement.
Like in every form of legislation, there are some good things and some not so good things. I thought I’d run some of the major changes that will affect you and I as individuals.
The first major change is that the new law will increase the age of minimum required distributions. In the past, you had to begin withdrawing from your retirement accounts when you turned 70½. Under the new law, the age would be raised to 72. Thus, allowing your money to grow tax deferred for another year-and-a-half.
The SECURE Act also eliminates the age cap for traditional IRA contributions. Under the old law once you turned 70½ you were no longer eligible to invest in a traditional IRA. The SECURE Act changes that. As long as you’re working, you’ll be eligible to contribute into your traditional IRA.
The new legislation has increased the tax credits available to small businesses in order to offset the cost of retirement plans. In the past, small businesses that started a retirement plan were only able to get a $500 a year credit. That has been changed and now the maximum is $5,000. The SECURE Act also allows small businesses to join multiple employer plans. Hopefully, this will lower the administrative cost to small businesses and make it easier for them to offer some sort of retirement savings plan, like a 401(k), to their employees.
As with any piece of legislation, there will be parts of it that many people disagree with. In the SECURE Act, many people will be disappointed that stretch IRAs will be eliminated. Under the old rules, if you inherited a non-spouse’s IRA, one of the options that you had with regard to distributions was to take distributions over your life expectancy. This allowed many people to defer the taxes owed on IRAs for decades down the road. That is no longer going to be an option. According to the SECURE Act, all inherited IRAs must be distributed within 10 years of the IRA owner’s death. The one exception to this is if you were the spouse. The surviving spouse will continue to have available favorable types of distribution options.
For those of you who currently have stretch IRAs, you don’t have to worry. If you inherited an IRA and you’re taking distributions over your life expectancy, there will be no change for you. The new law applies to someone who dies after 2019.
Another provision in the new law may also cause some issues. Under the new law, it will be easier for 401(k) plan sponsors to offer annuities and other lifetime income options. Having a guaranteed lifetime income could be an option that people like. However, the red flag is that annuities offered through 401(k) plans may not be the most consumer-friendly product. Some annuities are notorious for excessive fees that employers may not be overly concerned with. However, you and I as the consumer need to be concerned about these fees. Therefore, my advice is before anyone selects the annuity option in their 401(k) plan, they shop other alternatives. You can’t assume that the annuity offered in the 401(k) plan is the best one for you.
On the whole, there are lots of positives to the SECURE Act; however, there are also some landmines that you need to be cautious of.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.