The new Setting Every Community Up For Retirement Enhancement (SECURE) Act, just signed by President Trump, is the broadest piece of retirement legislation passed in 13 years. Ultimately, the law focuses on retirement planning in three key areas: 1) modifying required minimum distribution (RMD) rules for retirement plans; 2) expanding retirement plan access and 3) increasing lifetime income options in retirement plans.
The most immediate impact of the bill will be felt by those nearing or in retirement. If you’re a saver or investor in your 50s or 60s, there are six ways the SECURE Act may affect you:
1. Required Minimum Distribution Relief for Retirement Plans
Before the SECURE Act, if you had money in a traditional Individual Retirement Account (IRA) or an employer-sponsored retirement plan and were retired, you were required by law to start making withdrawals at age 70 ½. But for people who haven’t hit 70 ½ by the end of 2019, the SECURE Act pushes out the RMD start date for most situations until age 72.
By pushing back the RMD start date, the SECURE Act gives you additional time to allow your IRAs and 401(k)s to grow without being depleted by distributions and taxes.
2. Additional Roth IRA Planning Opportunities
Because RMDs won’t start until age 72, the new law will give you an additional two years to do what are known as Roth IRA conversions without having to worry about the impact of required distributions. With a Roth IRA, unlike a traditional IRA, withdrawals are tax-free as long as you meet certain requirements and there are no RMDs during your lifetime. The general goal of a Roth conversion is to convert taxable money in an IRA into a Roth IRA at lower tax rates today than you expect to pay in the future.
While you can do Roth conversions after you start RMDs, the process is a lot harder.
3. Increased Savings Opportunities
The SECURE Act also increased retirement savings opportunities in a number of ways.
Before this law, you couldn’t contribute to a tax-deductible IRA after 70 ½. But with the SECURE Act, you can. So, if you plan on working into your 70s, you can still put money into a deductible IRA. Those over 70 ½ in 2019 won’t be able to save in an IRA for this year.
This law change means a couple over 70 ½ will be allowed to save to an IRA over $14,000 in 2020 if both spouses are contributing the maximum of $7,000 a year. This can help them receive a valuable tax deduction and save for the future.
As more retirees are looking for ways to go back to work part-time in an encore career or in the gig economy, the SECURE Act will provide additional retirement funding flexibility for years to come.
Another SECURE Act provision will make it easier and less expensive for small business owners to set up retirement plans for employees. The new rule will let more small businesses band together to offer what are called Multiple Employer Plans or MEPs.
David Hanzlik, vice president, annuity and retirement solutions at CUNA Mutual Group, says: “Many people are behind in building their retirement savings and any measures that potentially help them gain access to the benefits of a workplace retirement plan are great.”
However, it could be a few years before small business employees without retirement plans see their employers offer them as a result of the SECURE Act. The law’s MEPs provisions don’t take effect until 2021. Additionally, the U.S. Department of Labor will need to clarify the rules before many small business employers will feel comfortable providing retirement accounts.
The SECURE Act also will also allow more part-timers to save through employer-sponsored retirement plans, starting in 2021. In some cases, these workers will need to put in at least 500 hours a year for three consecutive years in order to be eligible for the plans.
4. Promised Lifetime Income From Retirement Plans
The SECURE Act will also encourage employers with retirement savings plans to let employees convert their savings into Promised lifetime income, through annuities. Employers will be protected from being sued if the insurer they choose to make annuity payments doesn’t pay claims in the future.
But it will likely take years before many employer-sponsored retirement plans offer annuities due to the SECURE Act.
5. A Reason to Review Beneficiary Designations
The SECURE Act also removed so-called “stretch” provisions for beneficiaries of IRAs and defined contribution plans, like 401(k)s.
In the past, if a traditional IRA was left to a beneficiary, that person could, in most cases, stretch out the RMDs over his or her own life expectancy, essentially “stretching” out the tax benefits of the retirement account. But with the new law, starting on Jan. 1, 2020, most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.
Surviving spouses, minor children and those not more than 10 years younger than the deceased, however, are generally exempt from this new SECURE Act 10-year distribution rule.
So, the SECURE Act means it’s now very important to review the beneficiary designations of your retirement accounts to make sure they align with the new beneficiary rules.
6. A Reason to Review Trusts
In the past, many people used trusts as beneficiaries of IRAs and 401(k)s, with a “pass-through” feature that let the beneficiary stretch out the tax benefits of the inherited account. The benefit of the trust was, in part, to help manage the inherited retirement account and to provide protections from creditors. However, many of these trusts provided the beneficiary or heir with access to “only the RMD due each year.” But the SECURE Act states that all money must be taken out by the end of year 10 after the year of death of the owner.
Anyone with a trust as the beneficiary of an IRA or employer-sponsored retirement plan such as a 401(k) should immediately review the trust’s language to see if it still aligns with his or her intended goals.
Start Planning Now
Many of these SECURE Act rule changes require proactive planning.
So, it is important to speak with a qualified professional about them and your financial and retirement situation.