John J. Diak, CFP®
The SECURE Act
In late December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE Act). If this flew under your radar, you’re not alone. Now is the time to take notice and learn about what it means for you.
With millions of Americans chronically unprepared for retirement, the intention of the SECURE Act is to help more employees fund their retirement with workplace retirement plans and to simplify the process, shoring up retirement security for more people than ever before.
Although it passed with overwhelming support in the House and Senate, the new law is not without its critics and skeptics. Most importantly, the sweeping changes within the legislation will fundamentally alter the financial planning landscape and there are likely implications that will impact your existing retirement plan that you need to know.
Here is a summary of the major SECURE Act changes you may want to discuss with your financial advisor.
Inheriting Retirement Accounts
Those who inherit an IRA or other retirement account will be subject to new rules. Whereas in the past non-spouse heirs of retirement funds had to take required minimum distributions (RMDs) based on their age, under the SECURE Act, an inherited IRA must be distributed, in full, within 10 years, subject to ordinary income taxes.
Until now, younger non-spouse inheritors had lower RMDs that increased incrementally each year, allowing them to enjoy tax-free compounding over time. This was known as the “stretch” IRA. With the new provision, most (but not all) non-spouse heirs will be required to take out the full amount during their peak earning years, possibly having severe and unexpected tax consequences.
Because of these changes, wealthier individuals might want to consider moving some of their traditional IRA assets into a Roth IRA, paying lower taxes now, and allowing their heir to take the Roth IRA distributions tax-free.
Some heirs fall under key exceptions to the SECURE Act and will be able to continue taking distributions according to the old rules. This includes spousal, disabled, or chronically ill beneficiaries, as well as minor children of the original retirement account holder (only until the age of maturity) and heirs who are not more than 10 years younger than the decedent.
Traditional IRA Changes
Before the SECURE Act, people had the option to continue contributing to their 401(k) plans and Roth IRAs after retirement age, but traditional IRAs would not allow this. Now people who are still working beyond the age of 70.5 can continue to make traditional IRA contributions as well, with no maximum age.
Prior to SECURE Act changes, the start age for required minimum distributions (RMDs) was 70.5, and now that age is 72. While not a major change, this delay means older workers can now allow their money to compound for an additional year and a half before they must take it out and pay taxes on it.
No changes, however, have been made to the date at which an individual can begin using their IRA or inherited IRA to make Qualified Charitable Distributions (QCD). Even though the RMD requirements have changed, after turning 70.5 individuals still have the option to make a QCD of up to $100,000 for the year, which will reduce the necessary RMD.
Employer Retirement Plan Changes
Setting up and managing retirement accounts for employees has always been a costly and complex undertaking for employers. With the SECURE Act changes, small businesses can come together now to set up a “pooled employer” aggregate for 401(k) plans and other retirement plans, potentially making management and compliance less expensive and cumbersome. Plus, any business that sets up its first 401(k) plan will receive up to a $5,000 tax credit as an incentive. This will give more people access to employer retirement accounts.
Additionally, employers can get a tax credit for setting up their 401(k) plans to include automatic enrollment of new employees, meaning employees will have to opt-out, rather than opt-in. And employers can auto-escalate contributions to up to 15% of an employee’s pay.
The idea here is that if employees are enrolled automatically and their contributions are increased automatically, they will be more likely to start saving for retirement sooner than they would have in the past. This may be especially helpful for younger, lower-compensated employees who tend to put off retirement savings and miss the benefits of compounded earnings over their working life.
Under the new provision, 401(k) plans will also be required to permit coverage for long-term, part-time employees. This would allow anyone who works for at least 500 hours over three consecutive years to contribute to a company’s 401(k) plan, providing retirement accounts to a broader range of workers, which may have implications for some consultants and gig-economy workers.
With the SECURE Act changes, 401(k) plans and other qualified plans will have the option to include annuities as an investment vehicle. It’s important to keep in mind that while annuities can provide a guaranteed income for life, there is less flexibility and you would not be able to access cash to borrow for emergencies. Also, critics are warning that there are no regulations within the new provision that prevent salespeople from pushing high-commission annuities through the 401(k) market, which may not be the best choice for investors.
How Will the SECURE Act Impact You?
The SECURE Act has 29 new wide-ranging provisions that may affect you, including changes related to birth or adoption, graduate school stipends, foster care payments, and more. Many aspects of retirement planning have changed quite dramatically and suddenly with the passing of this legislation, and you should be eyeing these changes carefully, with the help of your financial advisor.
While the stated purpose of the SECURE Act is to move the needle on the retirement crisis in America, it’s up to you to protect your own financial future.
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.