Important Things to Know About the SECURE Act
By Todd I.Youngdahl, CFP® and Maura C. Schauss, CFP®
On the whole, Americans are woefully unprepared for retirement. (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 lower standard of living in retirement. Policy-makers and employers have noticed this crisis and have now taken the first step to help retirees manage their money and pre-retirees plan ahead.
Back in May 2019, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was passed with bipartisan support by a count of 417-3. On December 20, 2019, President Trump signed the bill into law, making it easier for retirees to have a reliable stream of income that lasts through retirement—exciting news for the many Americans who are concerned about stretching their retirement dollars.
While the SECURE Act bill proposes over 20 changes, here are 6 major changes that will affect you if you have an IRA or 401(k).
1. Liability Protection for Annuities in Employer Sponsored Retirement Plans
Annuities are a type of insurance that guarantees a monthly income in retirement. They’re usually part of pension plans. Annuities aren’t popular 401(k) options because the employer can be sued if the insurance company goes out of business or fails to pay a claim.
Under the SECURE Act bill, the liability would be removed from the employer. This means more employers could offer annuities to their employees without having to worry about being held liable for unpaid claims. The benefit to you is that you get more options to diversify your retirement income through different types of investments.
2. No More Contribution Age Caps on IRAs
Under the current law, a plan participant can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (2) Under the SECURE Act, this age cap would be removed.
3. Required Minimum Distribution (RMD) Age Raised to 72
Currently, people who have money in 401(k)s or other tax-deferred plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (3)
Under the SECURE Act bill, the new mandatory withdrawal age would be 72. This is helpful for those who are still working or are trying to stretch their savings out for a longer retirement.
4. Additional Exception to the IRA 10% Penalty Added
The new law would require employers to list a participant’s projected monthly retirement income on their 401(k) statements. This projected monthly income would be based on their current account balance and would give plan participants time to adjust their savings rate and better prepare for retirement.
The bill would also allow new parents to make a penalty-free withdrawal of up to $5,000 from their retirement account within the first year of their child’s birth or adoption. This money could then be used to cover child-related expenses.
Under the SECURE Act, long-term, part-time workers would be able to finally take part in 401(k) plans. This is great news for women who disproportionately take on part-time work to care for children and aging parents.
5. Lifetime-Income Provision
There’s plenty of advice on how to accumulate wealth using your 401(k), but no one really talks about how to manage your wealth once you retire. The new lifetime-income provision, coupled with annuities, would ensure retirees don’t outlive their money.
If your employer doesn’t offer annuities, the bill would allow you to roll your accounts over to an IRA so you could continue contributing to your retirement.
6. Changes to Stretch IRA Provision for Inherited Retirement Accounts
Under the current law, inherited retirement account distributions can be spread out over the recipient’s lifetime. Under the SECURE Act, a recipient would be required to withdraw the money—and pay taxes on it—within a 10-year period.
This doesn’t affect those who inherit smaller accounts. But for those who inherit larger accounts, taxes will have to be paid over a shorter amount of time, which means a higher tax bill. And, for those who inherit an account in their prime-earning years, their tax burden will increase even more, decreasing the value of the account. Surviving spouses and minor children are exempt from this rule.
Your First Step
If you’re concerned about how the SECURE Act will affect your path to retirement, we’re here to help. At Washington Wealth Advisors, we help you make what you’ve saved last the rest of your life so you can live out your retirement the way you want, and pass on your money to your family without worry. To learn more about the SECURE Act and how it affects your retirement savings, call our office at 703.584.2700 or schedule a meeting with us.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.