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. Guaranteed Lifetime
Income From Retirement Plans
The SECURE Act will also encourage employers
with retirement savings plans to let employees convert their savings into
guaranteed 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.
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