Are You SECURE in Your Retirement Planning?
Signed into law December 2019, the Setting Every Community Up for Retirement Enhancement bill, or SECURE Act, includes sweeping changes to tax-advantaged retirement and savings accounts, which could significantly impact your long-term financial plans. In particular, the bill changes the rules your tax-advantaged accounts must follow in terms of funding, distributions and the way your accounts are administered.
Below are some of the highlights of the SECURE Act.
IRA Wins & Losses
- 72 is the new 70 1/2 for IRAs – You will now have until age 72 to take your first required minimum distribution (RMD) from an IRA. Previously, it was age 70 ½. You can also continue contributing to your IRA even after you turn 72 if you have earned income. This is a major win for retirees, because it allows tax-deferred earnings to continue growing over time before having to withdraw a minimum amount each year. What’s more, you can keep contributing funds to your IRA even after you turn 72, so your account can continue to grow over time from investment returns and what may be tax-deductible contributions.
- Death of the Stretch – Prior to the bill, if you had an IRA and left it entirely to your children, those children could “stretch” required minimum distributions out over their lifetimes. With the new rules, those children will have to take distributions for the full balance of the IRA by the end of the 10th year. Compressing that time frame means larger distributions, which will likely result in a larger tax liability during what may be some of an IRA beneficiary’s prime earnings years when he or she may be in higher tax brackets. Also, if you have established trusts as your beneficiary, check with your advisor to see how that impacts your beneficiaries. Some trusts may force all the distributions out in the tenth year which could be contradictory to your original estate planning goals.
- Penalty-Free Distributions for Children – Yes, you read that correctly. The SECURE Act allows parents to withdraw up to $5,000 from an IRA or 401(k) to pay for adoption or childbirth expenses without penalty, but taxes will be due on the amount distributed. The benefit here is, if you don’t have access to other sources of funds, your retirement accounts are now an option. The downside is that while it’s good to have options, there may be better ways to fund these kinds of expenses since distributions from your 401(k) may hinder the growth of your retirement account in the long run.
401(k) Successes and Setbacks
- Small-Business Owner? Read this – One of the noteworthy changes accompanying the SECURE Act is the ability for small-business owners, regardless of the industry they work in, to band together to create what’s called a Pooled Employer Plan (PEP). If you have ever worked at a large company you may be familiar with a 401(k), but if you’re a small professional practice, chiropractor, or even a small restaurant, establishing those types of plans may be cost and time prohibitive. Under the SECURE Act, to encourage enrollment and employee participation in retirement savings, small businesses can get together and create a PEP, which allows them to share costs, investment lineup, and any annual administrative duties involved in maintaining the plan. Small businesses will also receive a tax credit for implementing automatic enrollment, so employees have to opt-out rather than opt-in.
- Part-Time Work, Full-Time Retirement Account – Prior to the SECURE Act, part-time employees could be excluded from employer retirement plans, but now individuals who have worked with a company at least three years and at least 500 hours per year or 1,000 hours in the past year can enroll in their employer plan.
- An Answer to Market and Cash-Flow Uncertainty – One of the goals of the SECURE Act was to address the increasing problem of individuals retiring and not having adequate savings or being unsure about how to invest their retirement proceeds to adequately meet their cash-flow needs in retirement. To address that challenge, one of the more intriguing changes of the SECURE Act is the removal of some of the barriers that employers had previously experienced in providing annuities in retirement plans. With the change in the law, retirees may now more easily purchase an annuity within their retirement plan to help ensure they have a steady stream of income throughout retirement.
529 Plans Improved – The passage of the Tax Cuts and Jobs Act (TCJA) of 2017 expanded the role of 529 plans so families could use them for educational expenses prior to college. The SECURE Act continues that trend by allowing individuals to use 529 Plan funds to pay off up to $10,000 of student loans per year.
Questions to Ask Your Advisor:
If you are not sure whether these changes will impact you directly, consider asking your advisor these questions:
- How will changes from the SECURE Act influence my financial plan?
- Will these changes affect my estate plan and do I need to amend my documents?
- Is a Roth IRA conversion an appropriate strategy for me prior to or immediately following retirement?
- Is my business eligible for an PEP and, if so, can you help me set that up?
- What tax strategies can I use from the passage of the SECURE Act to better set me up for success?
The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.
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