It’s official. Retirement reform has made its way through Capitol Hill. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is now law, signed by President Trump in mid-December. The SECURE Act will likely have an impact on every retiree – whether small or large.
The impetus behind the Act was to broaden opportunities for folks to increase their retirement savings. But it’s not entirely altruistic. Let’s walk through the good, the “eh” and the not-so-good.
We’ll start with the good. With SECURE, employees aren’t restricted from making contributions to their IRAs once they hit age 70½. Instead, you’re now allowed to contribute as long as you work. So, the timeframe that you can grow your IRAs has increased from the age-cap to indefinitely!
Another good piece of this legislation is the creation of multi-employer 401(k) plans. Beginning in 2021, businesses from different industries can pool the costs of creating retirement plans.
This provision allows small companies to create 401(k)s for their employees under one shared plan provider. By banding together, these businesses can compete for better plans that were previously only available to large employers. Before SECURE, only companies with “similar characteristics” could establish multi-employer plans.
Now for an “eh.” The Act raises the age for taking required minimum distributions (RMDs) from 70½ to 72. Remember that RMDs apply to employer-sponsored plans and traditional IRAs. This one isn’t a huge deal, but it could prove to be positive for many retirees.
These RMDs are a thorn in the side of many retirees. No one likes being forced to pull money out of their retirement accounts and have to pay taxes on the withdrawals, especially when you don’t need the money!
The caveat is that if you’re already taking RMDs, you have to continue doing so. The new rule didn’t take effect until January 1, 2020, and for those taking RMDs, you’re grandfathered in under the old rule. But, for those that turn 70½ after December 31, 2019, the new law comes into play, and you get that extra year-and-a-half to delay your RMDs.
Now for the not-so-good. The SECURE Act has done away with stretch IRAs, creating an enormous change in estate planning for inherited IRAs and how they are treated.
Under the old law, a beneficiary of an IRA account could stretch the distributions over their lifetime. The stretch aspect of these inherited plans also meant that the beneficiary wouldn’t have to face down a huge tax bill, as they were allowed to draw down from the account slowly.
Now, SECURE has created a 10-year limit on taking distributions. Let’s use an illustration for how the law is a game-changer for inherited IRAs:
Say you were age 45 and you inherited an IRA from a parent. Under the stretch IRA provisions, you were allowed to spread out how quickly you were forced to take money out – call it over 40 or 50 years. The measuring life was your lifetime.
Now, you have to take all of the money out within 10 years. While there’s no annual limit, you must take all of the money by the end of year 10, whether or not you need it, and no matter if it creates a massive tax bill!
But spouses can still inherit an IRA and take it as their own (using their life expectancy for RMDs), so this rule change will have the most significant impact on families and individuals who are leaving IRAs to anyone other than a spouse.
There are some exceptions to the 10-year rule. We’ve talked about one – surviving spouses. Others include heirs of IRAs whose original owners died before 2020, minor children up to the age of majority, or age 26 if the child is still in school (at that point, the 10-year payout begins), chronically ill or disabled heirs, and heirs within 10 years of age of the original owner.
So, there you have it. Retirement reform has swept through Congress and provided a new framework for the years to come. Overall, I think SECURE will work to help people save for retirement and come out as a net positive. It’s just when it comes to estate planning that it turns sour. But, in this case, I believe we’ve gotten a net positive out of Washington.