The Setting Every Community Up for Retirement Enhancement (SECURE) Act will affect many retirement plans ranging from employer-sponsored ones like 401(k)s to individual retirement accounts (IRAs).
Because the law covers many areas related to retirement and savings, the specific ways the new rules will affect retirement planning depend on your personal circumstances. However, some of the more notable changes from the SECURE Act that might impact you include:
- Ending the stretch IRA: You may have planned to pass on your IRA to someone other than a spouse. Previously, these accounts could be stretched out for long periods (hence the term “stretch IRA”) and continue to grow on a tax-advantaged basis. Under the SECURE Act, a non-spouse beneficiary must distribute inherited IRA assets within 10 years of the original account holder passing away. Your clients might want to take another look at their estate and tax planning strategies if they were hoping to pass on their IRA to their children as an inheritance, for example.
- New age-related rules for IRAs: While the SECURE Act may speed up withdrawals regarding stretch IRAs, the law also raises the age at which someone has to start taking required minimum distributions (RMDs). Previously, RMDs started at age 70 ½, but the age has now been raised to 72. IRA owners who are still working in retirement also gain the benefit of being able to contribute to their account at any age, rather than being cut off from doing so at age 70 ½.
- Greater prevalence of annuities in retirement plans: The SECURE Act eases rules on annuities in retirement plans, which will likely make these products more prevalent. For example, the law eases fiduciary requirements for retirement plans. A plan is now responsible for picking an acceptable insurer that provides annuities, rather than being held responsible for choosing specific annuity products that meet fiduciary obligations.
- For you, this change may mean you need help assessing whether a potential annuity is appropriate for their retirement plan. These products may be suitable for people with particular risk profiles and income needs, rather than being something that all investors need.
- Tax credits for small employers offering retirement plans: If you are small business owners, you may be interested in a new tax credit for adding a retirement plan for your employees or converting an existing plan to one that has automatic enrollment. For example, adding an automatic enrollment plan can enable employers to gain a $500 tax credit for up to three years.
- Penalty-free retirement withdrawals for births or adoptions: While retirement accounts are generally supposed to be held until someone reaches retirement age, exceptions for penalty-free early withdrawals exist. The SECURE Act expands on these exceptions by allowing individuals to withdraw $5,000 from accounts like 401(k)s and IRAs for costs related to having or adopting a child.
- While this option may seem appealing, it’s important to consider the risks of taking money out of a tax-advantaged retirement account early and not letting that money compound for retirement. What’s more, you would need to pay tax on the money you withdrew. As such, you may be better off finding another source of money, if possible, to use for birth or adoption expenses.
While the SECURE Act will not likely upend the way Americans save for retirement, it has many small changes that can add up to making a big difference. It is important to consider any changes to a financial or retirement plan in connection with other areas, like taxes or estate planning.
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If you would like to learn more about the SECURE Act, check out our podcast, Retirement Plan Playbook, on this topic as well.