On the whole, Americans are woefully unprepared for retirement, with recent data from the U.S. Bureau of Labor Statistics showing that only 55% of workers participate in a workplace retirement plan. (1) With wages not increasing as quickly as living costs, many people are unable to save as much as they’d like and face a potentially lower standard of living in retirement. Policy-makers and employers have noticed this crisis and have now taken the first step to address the situation.
Enter the Setting Every Community Up for Retirement Enhancement (SECURE) Act, recently signed into law on December 20, 2019. The objective of the SECURE Act is to help bring better retirement security to US workers.
But as is always the case when a law is passed, the changes are still very new, and clarification from regulators may be needed in some areas in the months ahead. However, I wanted to share a quick summary of the key takeaways of the SECURE Act and what it means for you and your money.
Better Access To Retirement Plans For Small Business Employees
The SECURE Act makes it easier for small businesses to offer safe harbor retirement plans for their employees. Small businesses now qualify for a tax credit (from $500 up to $5,000) when they establish a 401(k), 403(b), SEP IRA, or SIMPLE IRA, and an income tax credit when they add automatic enrollment to their plan. (2) Starting in 2021, small businesses will be able to join together with other unrelated businesses in “multiple employer plans” to leverage economies of scale and keep their 401(k) costs down.
Retirement Plan Conversion To Lifetime Annuity
Annuities are a type of insurance product that can offer a steady income stream. Annuities aren’t popular 401(k) options because the employer can be liable if the insurance company goes out of business or fails to pay a claim.
Under the SECURE Act bill, this liability would be removed from the employer. This means more employers could offer annuities within their plans without having to worry about being held liable for unpaid claims. The benefit to you is that you may have the potential to turn your retirement savings into an income stream in the form of annuity payments should your plan adopt this feature.
Age Limit Cap Removed For IRA Contributions
Under the current law, an individual can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (3) Under the SECURE Act, this age cap would be removed, aligning traditional IRAs with Roth IRAs. Keep in mind that earned income is still a requirement to contribute to an IRA account.
Required Minimum Distribution (RMD) Age Raised To 72
Currently, those with balances in IRA’s or other tax-deferred savings plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (4)
Under the SECURE Act bill, the new mandatory withdrawal age is 72. This is helpful for those who are still working or are trying to stretch their savings out for a longer retirement. Those who turned 70½ in 2019 and before will continue taking their RMDs under the old rules. Although this doesn’t seem like a major change, we have already seen the positive effects this has on retirement cash flow projections for some of our clients.
Elimination Of The Stretch IRA
In my opinion, a notable provision of the SECURE Act is the elimination of the stretch IRA. This means that a non-spouse beneficiary can no longer stretch distributions from an inherited retirement account over their lifetime. Instead, all retirement assets must be distributed by the end of the 10th calendar year following the year of the account owner’s death.
This change can lead to potential tax issues for non-spouse beneficiaries that inherit assets during their prime earning years. There are some exceptions for minor children, chronically ill, disabled, and anyone not more than 10 years younger than the account owner. This new rule applies to retirement accounts inherited on or after January 1, 2020.
How Should I Approach These Changes?
If you’re concerned about how the SECURE Act will affect your path to retirement, we’re here to help. To learn more about the SECURE Act and how it affects your retirement savings, schedule a phone call now and read more details about the new law here.
About Rocklin Senavinin, CFP®
With over 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc on LinkedIn or visit www.fidwm.com. If you have questions, feel free to schedule a phone call using this link.
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person.
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