SECURE intends to smooth out some of the issues around retirement savings and addresses certain limitations
By Brian Harrigan and Bob Price
Retirement reform has been a topic of major concern these past few years. The 2018 year closed with several retirement bills making progress which continued into 2019.The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the most recent piece of retirement legislation that passed in December of last year and began Jan 1. 2020.
As the first major retirement legislation since the Pension Protection Act of 2006, the bill intends to smooth out some of the issues around retirement savings and addresses certain limitations. The bill should help most Americans, but not all. While addressing IRA age limitations, extending the age for RMDs, and providing better access to plans for small employers are positives, many argue the plan won’t have much of an impact for many Americans.
Major issues that affect retirement security stem from rising health care/drug costs, the social security funding deficit, and strains on government programs Medicare and Medicaid. In addition, roughly one third of Americans are not saving for retirement so many of these provisions will not have much impact on them. These changes are a step in the right direction and could pave the way for new legislation. Below are a few areas the bill addresses that are worth a closer examination when planning for retirement.
Increasing Small Employer
Access to Retirement Plans
This part of the bill provides the ability to pool multiple employers’ increasing capacity to offer retirement savings to employees. Employers can pool resources to set up 401k plans with less liability and less overall costs. Simple and SEP IRAs were designed to help improve retirement savings options for this group of Americans. Still, many small employers offer no savings options leaving this up to employees to address on their own.
Increased Annuity Options
Inside Retirement Plans
This provision allows 401k plan sponsors to select annuity providers to offer options inside the retirement plan. The new rules reduce the risk of sponsor liability which has been a major concern in the past. This change increases options for investments with protected growth and lifetime income providing more security to retirement savings.
Increased Age for Required Minimum Distributions
Prior to 2020, Americans with qualified funds (401ks, IRA’s, etc.) were required to start liquidating those accounts at age 70.5. With many Americans paying little to no estate tax given the lifetime exemption limits, the government wants to be able to tax the money retirees have yet to pay tax on before they die. By starting RMDs at age 70.5, the government can tax the majority or all these accounts during a person’s lifetime and inject more money into the economy. To address the fact that more Americans are living longer, the mandatory age for taking these distributions has been changed to 72.
Removal of Age Limitations for IRA Contributions
For people who have continued to work later in life, the government has not allowed anyone age 70.5 or older to contribute to an IRA unless it is a ROTH IRA where taxes on contributions are paid up front. The SECURE Act removes this limitation offering more opportunity for building retirement savings and tax deductions.
Removal of the “Stretch”
Inherited IRA Provisions
Prior to 2020, inherited retirement plans like traditional IRA’s, 401ks, etc. could spread the required minimum distributions over a non-spousal beneficiary’s lifetime. As of 2020, non-spousal beneficiaries are required to distribute these funds in no greater than a 10-year period.
The SECURE Act is a step in the right direction that will likely lead to other reforms. We hope this is the first step towards addressing retirement security for those who need it most. Like any legislation, this reform will happen slowly. Retirees should analyze the implications this bill may have on financial and estate planning needs. We recommend reviewing strategies used to maximize retirement savings and what is passed on to loved ones with a financial professional.
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