It’s not every day that Congress makes major changes in the way Americans save for retirement. You could argue that the last real change was back in the 1970s with the birth of the 401(k) account. But tucked away in the latest approved budget bill was just that: new changes. The Setting Every Community Up for Retirement Enhancement or SECURE Act has several major implications for retirement savers. From new tax advantages to additional ways to gain guaranteed sources of income from your nest egg, the SECURE Act has plenty of different points to offer.
For financial advisors and individual investors, the newly passed bill’s features have some interesting planning opportunities as well as potential pitfalls. Understanding the mechanics of the act, what it entails and how to exploit the benefits are all key.
With that in mind, here are some of the major points of the newly passed SECURE Act and what it could mean for your retirement planning.
Click here to read about the three biggest risks for your retirement portfolio.
SECURE Act Basics
It’s no secret that Americans are facing a retirement dilemma. According to the Center for Retirement Research at Boston College, 52% of U.S. households are at risk of not being able to maintain their pre-retirement income through retirement. According to Vanguard, average balances for retirement accounts and savings only clock in around $58,000.
With this as their impetus, House members Richard Neal, Kevin Brady, Ron Kind and Mike Kelly introduced the SECURE Act to the House Committee on Ways and Means. As one of the few pieces of bipartisan legislation, the bill eventually passed the Senate after sitting in legislative limbo, and was signed by President Trump on December 20.
The SECURE Act pinpoints many of the common ways Americans save, including via retirement accounts, education spending and other broader income needs. The bill features many reforms that were initially designed to make retirement saving easier and more accessible for many Americans. It’s the first major piece of retirement-related legislation enacted since 2006’s Pension Protection Act. While the bill is lengthy, it does cover a few broad areas.
Given the main motivation for the law was saving for retirement, the bulk of the SECURE Act deals with our golden years. One of the more beneficial pieces of the law could be the rollback of the so-called required minimum distributions (RMD) from Traditional IRAs and 401(k) plans. Savers can now wait until 72 before being required to withdraw RMDs and pay taxes on these withdrawals. Additionally, savers now have the ability to contribute to the 401(k)s past age 70 ½.
And speaking of those withdrawals, the SECURE Act makes it easier for savers to turn their portfolios into a steady stream of monthly income. The law allows employers and plan sponsors to include annuities and insurance products in workplace retirement plans to generate income. However, some critics are rightfully worried as the law removes plan sponsors’ liability if the insurer cannot meet its financial obligations to pay savers. The SECURE Act did this by removing some fiduciary requirements governing workplace plans.
Perhaps the best part of the SECURE Act is that it gives access to workplace retirement to more Americans. For starters, the law now allows businesses to sign up part-time employees to retirement plans. Workers can now sign up for a plan if they work either 1,000 hours throughout the year or have three consecutive years with at least 500 hours on their timesheet. Secondly, more businesses should be able to create plans in the first place. The law provides a tax credit of $500 per year to employers who create a 401(k) or a SIMPLE IRA plan with automatic enrollment.
In addition to the SECURE Act’s major retirement benefits, the law also helps parents when it comes to saving. This includes a few provisions for 529 plans. The major one comes down to 529 plans and student loans. 529 plan funds can now be used to pay down student loan debt – up to $10,000 annually. At the same time, the law helped expand what a 529 plan can be used for and can now include certain apprenticeship programs and technical accreditation.
Finally, the SECURE Act includes another provision for parents looking at adoption. The law will permit an individual to take a “qualified birth or adoption distribution” of up to $5,000 from a 401(k) or an IRA to help pay for the cost of adoption services. The 10% early withdrawal penalty will not apply to these withdrawals.
No More Stretch IRA
However, the SECURE Act may not be all milk and honey for savers. The bill does take an axe to some very popular ways to skirt taxes. This includes inherited IRAs/401(k)s also known as stretch IRAs. Now, beneficiaries of inherited IRAs must withdraw all assets within 10 years following the death of the original account holder. Previously, inherited IRAs could be kept until the beneficiary turned 70 ½ and was required to take RMD.
Talk to Your Advisor
Given the wide-sweeping range of the SECURE Act, the law does change some major points with regards to retirement planning. For example, the stretch IRA has long been a successful planning tool to reduce taxes and provide money for heirs. With it gone, planners and savers may need to update their estate plans and reconfigure their wills. This is also true with regards to the higher age limits for RMDs. Planners will need to evaluate the benefits of the additional tax deferral.
Another potential point to consider is the addition of annuities in retirement plans. Generally, annuities are complex instruments and require plenty of due diligence before jumping. Advisor and savers need to evaluate all their options on whether or not having one as a portion of their retirement plan is a good idea.
Dividend stocks may be a better idea than an annuity. Use the Dividend Screener to find high-quality dividend stocks. You can even screen stocks with DARS ratings above a certain threshold.
The Bottom Line
With the SECURE Act now law, the changes to the retirement ecosystem are vast. With more opportunities for savers to build a real nest egg, Americans may be better suited to take up the retirement challenge. Understanding the basics of the law are key and planners/savers should include these in their conversations when it comes to retirement.
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