How the SECURE Act Affects Your Retirement
The SECURE Act stands for Setting Every Community Up for Retirement Enhancement Act of 2019. It was signed into law on December 20, 2019 by President Trump. The intended goal of the act is to increase access to tax-advantaged accounts and prevent older Americans from outliving their assets.
As traditional defined benefit pensions leave the workplace and are replaced by defined contribution plans such as 401ks, employees are increasingly required to plan for and fund their own retirement. Unfortunately, many people at or near retirement have not saved enough to supplement their Social Security benefit so they can maintain an adequate retirement lifestyle. According to a recent Vanguard study, the median 401k balance for those age 65 or older is less than $60,000. The SECURE Act encourages employers who formerly found the establishment of a 401k for their employees to be too burdensome to revisit the idea.
Here are some things the SECURE Act does:
- Makes it easier for small businesses to enroll employees in automatic contribution arrangements by increasing the contribution limit from 10% to 15% after the first year of plan participation.
- Provides a $500 annual tax credit for employers who create 401ks or SIMPLE IRAs with automatic plan enrollment.
- Encourages retirement plan sponsors to include annuities in plan options by reducing liability on insurers.
- Pushes back the age for required minimum distributions (RMDs) from 70 1/2 to 72 for those who are not 70 1/2 by December 31, 2019.
- Allows the use of 529 college savings plans for qualified student loan repayments (up to $10,000 annually).
- Removes the age limit of 70 1/2 to contribute to an IRA. Now anyone at any age to contribute to an IRA as long as they have earned income.
One significant down side of the SECURE Act is the removal of stretch IRAs, which allowed non-spouse beneficiaries inheriting an IRA or 401k to stretch out taxable distributions over their lifetime. The act now requires full payout from the inherited IRA within 10 years of the death of the original owner. This change amounts to a tax increase and it is estimated the rule with bring in an additional $15.7 billion in tax revenue. NOTE: Beneficiaries who inherited IRAs from account holders who died on or before December 31, 2019 are subject to the old rules and can still stretch out the IRA distributions over their lifetime.
The broad changes found in the SECURE Act should be the impetus for a review of your estate and financial plan. Anyone who has utilized sophisticated IRA “conduit” trusts to provide supervision over IRA distributions to beneficiaries must now revisit the effectiveness of that type of planning and explore options, including the switch to an IRA “accumulation” trust.
