The SECURE Act went into effect on January 1, 2020.
And while we applaud the efforts of our government to improve the retirement planning landscape, like most things, they can’t seem to get it quite right.
Before we get into that though, let’s take a look at some of the notable provisions that you should know about:
Removal of the Age Limit for IRA Contributions
Prior to the SECURE Act, contributions to a traditional IRA were capped at age 70 ½. Why? Well, to put it frankly, the government would like for you to start paying taxes on that money as you begin to take distributions. By capping the contribution age at 70 ½, and mandating a Required Minimum Distribution age of 70 ½, Uncle Sam could collect on the taxes they were nice enough to allow us to defer during our working years.
Extended Required Minimum Distribution (RMD) Age to 72
An extra 1 ½ years may not seem like a very long time to let your IRA accounts continue to grow, and that’s because it’s really not. As I just mentioned, Uncle Sam is keen on collecting those deferred taxes. So, while you are now able to continue to contribute to your IRA indefinitely, you will still have to start taking RMD’s at age 72. From a Financial Planning perspective, the time-value of money rule certainly applies to this provision. Any additional growth that can be realized from your investments during this 1 ½ years is money in the bank. So it’s certainly worth taking advantage of if you find yourself in a position to capitalize on it.
Penalty-Free Withdrawals For New Parents
While it’s not exactly a boon for retirees, this provision allows new parents to take penalty free withdrawals from their retirement accounts within a year of the birth or adoption of a child to cover related expenses, up to $5,000. Of course, income taxes will still apply to withdrawals from traditional retirement accounts.
Student Loan Repayment Through 529 Savings Plans
While there are some who think the government should just forgive all student loan debt, there are others who believe that simply just doesn’t make much sense. So, in an effort to take a step forward in helping to manage the growing costs of college education, the SECURE Act has a provision to allow individuals to withdraw up to $10,000 from 529 savings plans to make student loan payments.
Lifetime Income Disclosure For Defined Contribution Plans
Defined contribution plans offered through an employer (such as a 401k or 403b) are now required to disclose an employee’s amount of sustainable monthly income that could be supported by their current retirement account. This may serve as an eye-opener to some when they are able to see how much money they will have to live off of in retirement when they begin taking distributions from these accounts. Hopefully it will encourage people to take a more proactive approach to their retirement planning.
Increased Access to Retirement Plan For Small Business Employees
Most small-business employees don’t have access to employer sponsored retirement plans. The SECURE Act expands access to these plans and allows small-business employers to join with other employers to offer 401k plans.
Lifetime Annuity Conversion for Retirement Plans
One of the more significant changes included in the SECURE Act is the provision to allow employers to offer annuities in the 401k. If you’ve ever had the displeasure of watching your 401k take a nose-dive during a market crash, this may be of great interest to you. Annuities offer growth with protection from market risk and the ability to provide lifetime income in retirement.
Say Goodbye to the Stretch IRA
Last, but certainly not least, the SECURE Act changes the “Stretch” provision of the IRA from Lifetime to just 10 years. This means that a beneficiary can longer stretch the distributions of an inherited IRA over his or her lifetime. Now, all retirement assets must be distributed out of the account within 10 years of the account owner’s death.
This is essentially the provision that will pay for every other “benefit” of the SECURE Act. It is estimated to bring in $15.7 billion to the U.S. Treasury over the next 10 years. I saved this for last because I want to drive home the point that Uncle Sam doesn’t do anything by accident. There’s always something in it for them.
Prior to this change, inherited IRAs could be stretched out over the beneficiary’s lifetime, providing decades of tax-deferred (or tax-free in the case of a Roth IRA) compounding growth. Now beneficiaries will be forced to take out every cent within 10 years and, of course, every bit of it is taxable.
The elimination of the Stretch provision presents significant changes and may require a review of your current estate plan to avoid increased tax-liabilities for your loved ones. Luckily there are several options available, such as a Roth-IRA conversion or using Life Insurance to pass on tax-free wealth to those we leave behind.
Let me be clear, I am very excited that Congress and our government are taking a closer look at the retirement crisis facing Americans. I’ll spare you the statistics, but suffice it to say that we still have a long way to go before we can say that we have solved our retirement “problem”. And while the SECURE Act is an obvious step in the right direction, it leaves a lot to be desired.
I encourage you to continue to educate yourself on all of your retirement options and make the decision that is right for you and your family. Speak with your financial professional, tax advisor or estate attorney about how these new laws might affect you. If you still have questions, or need a second opinion, feel free to give us a call.
This article provides general information related to financial planning and is not meant to serve as legal or tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a professional tax advisor or lawyer.
Please Follow and Like Us On Social Media
Focus Financial Group
Focus Financial Group has investment and retirement strategies that are designed to maximize your growth and minimize your risk. Our tax strategies reduce and often eliminate the tax liability on your retirement savings so you can take control of your money now and in the future. Building wealth and providing security for your family are just a few of things we do here at Focus Financial Group. Our mission is to help you achieve your financial goals, whatever they may be. We have helped clients from all walks of life and circumstances safely and securely grow their money. Whether it’s retirement planning you’re focused on or saving money to put your kids through college, we have solutions for that. Let’s start with a conversation about where you want to go and then make a plan to get you there. Consultations are always free so contact one of our experienced financial professionals today and get started down the path to financial peace.