How the new SECURE ACT rules may change how you save for retirement
In mid-December 2019, the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act was included as part of a massive spending bill approved by Congress.
Notably, this may be one of the most significant pieces of retirement legislation in years.
While we don’t feel it is going to solve our country’s retirement savings challenges, the changes are, by and large, improvements over the former rules. Here are the top four ways it may impact your retirement savings, plus two pitfalls to avoid.
1. The required minimum distributions (RMDs) age increased from 70½ to 72.
Previously, the year in which you turned 70½, you had to start taking required minimum distributions (RMDs) from your retirement accounts. Now, the rule is that RMDs begin in the year in which you turn 72. Who does this impact? Anyone with a retirement account (401(k), 403(b), traditional IRA, rollover IRA, SEP IRA or SIMPLE IRA) now has more time for their money to grow tax-deferred. (However, if you already turned 70½ in 2019, you are still required to take RMDs in 2020. How’s that for a Happy Birthday from your Uncle Sam?)
2. Contributions to a traditional IRA can now continue beyond age 70½.
Sailing off into retirement isn’t what it used to be. More people are considering working longer. In fact, almost 20 percent of 70 to 74-year-olds are currently working, according to the Wall Street Journal. This statistic is up from only 11 percent in 1992. This age limit elimination for contributing to a traditional IRA may be a helpful boost to those still working past 70½. (As always, you must have earned income in order to make an IRA contribution.) With the growing number of older workers in the workforce, we feel this will allow people even more time for their money to grow tax-deferred.
3. Non-spousal beneficiaries (think child or grandchild) are now required to fully deplete inherited IRAs within 10 years of the date of inheritance.
This is the most significant change in this Act, and it may have significant estate planning implications. Previously, a non-spousal beneficiary (like a child or grandchild) could take RMD withdrawals from an inherited IRA throughout his or her lifetime. This former rule allowed beneficiaries to grow their inherited account over a lengthy time frame, effectively “stretching” the IRA.
Now, the new rule requires the inherited IRAs to be fully depleted within ten years of the date of inheritance, which virtually eliminates the “stretch IRA” strategy. Of all the provisions in the SECURE Act, the Congressional Budget Office predicts this part will generate approximately 16 billion dollars (yes, billion) of additional tax revenue over the next ten years.
***NOTE: This Act does not affect existing inherited retirement accounts; only those inherited in 2020 and beyond.
If you have a retirement account with a trust as beneficiary, you should review the outline of that trust with your estate planning attorney to understand the implications of the SECURE Act. Trusts were historically established to hold an inherited IRA in order to provide certain tax benefits as well as the common safeguards and controls that make trusts desirable (i.e. asset protection from creditors, centralized asset management, and ensuring that a beneficiary does not receive a substantial and immediate distribution). The SECURE Act may cause significant unintended consequences of these trusts such as much higher taxes and less control. THESE SHOULD BE IMMEDIATELY REVIEWED.
4. It should now be easier for small businesses to band together to offer 401(k) plans through open multiple employer plans (MEPs).
The Act permits unrelated small businesses to band together to form one plan. So, small companies will be able to take advantage of economies of scale and offer features previously only available in larger retirement plans.
It’s important to add that this change will also help to lessen the plan sponsor or business owner’s fiduciary liability.
Pitfall to avoid: It is now easier for annuities to be offered in 401(k) plans.
A provision of the Act makes it easier for annuities to be offered in 401(k) plans. Meaning, there is a chance that expensive or unclear products could be included in the investment options offered. At Carnegie, we often find there are hidden fees and non-transparent costs within annuities. Annuities can be incredibly complicated, and the “guarantees” they provide almost always result in a measly return on capital over time. The devil is in the details.
Pitfall to avoid: Parents who just had a baby or adopted may withdraw up to $5,000 per parent from their 401(k) or IRA without the 10 percent early withdrawal penalty.
This new rule allows parents to make withdrawals without penalty (ordinary income taxes still apply). Sadly, this may derail retirement savings. Although parenthood is expensive, we believe retirement savings accounts should be used for retirement. Money that is withdrawn early may miss out on long-term compound growth opportunities in an IRA or 401(k) plan. (For example, that $5,000, if not withdrawn, could be worth over $16,000 20 years from now assuming a 6 percent annual growth rate.)
In summary, taxpayers must evaluate their options in a holistic manner considering the many ripple effects of the SECURE Act. Certain aspects are positive. Others, not so much. Overall, it is an excellent reason to call your advisor and review your plan.
Comments ore questions? I'd love to hear your thoughts and feedback. Email me at bblackburn @ carnegieinvest.com
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Carnegie Investment Counsel is a registered investment adviser with the Securities and Exchange Commission (SEC). The opinions presented are subject to change without notice. Performance information was obtained from third party sources. Although these sources are widely used, and Carnegie deems these sources reliable, Carnegie makes no guarantee as to the accuracy of the information provided by these third parties. The information provided is for general informational purposes only and should not be considered a solicitation to effect transactions in securities or personalized investment advice. Past performance is not a guarantee of future performance.