A major new piece of legislation aimed at bolstering retirement savings, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), was signed into law on December 20th. This new law will affect those actively saving for retirement and those already retired. Among other things, the bill is intended to get more people actively planning for retirement, encourage saving, update age restrictions, and change the timetable for withdrawals. There are many provisions in the new bill, but there are a few areas worth focusing on that will have an immediate impact.
One of the objectives of the law is to make it easier and less risky for small businesses to offer 401(k) plans to their employees. Although there have been attempts over the years, there has never been a sustainable solution incentivizing small businesses to offer retirement plans. The new law tries to ease some requirements by letting employers have access to multiple lower-cost plans. New plans will also be able to include annuity options and relax the liability concern employers had by offering annuities. Annuities are complex investments that should be reviewed diligently alongside your adviser to make sure they fit within your overall financial goals.
In an effort to make savings available to more workers, businesses will now be able to enroll part-time employees who work at least 1,000 hours throughout the year or have three consecutive years with 500 hours of service. Those employers offering auto-enrollment into a retirement plan can also receive a $500 tax credit, which helps offset the burden even further. This new decision will hopefully open up retirement options to a much wider audience and give working people more opportunity to begin the process of planning their financial future.
Another big part of the SECURE Act is a change to the Required Minimum Distributions (RMD) age. If you have a tax-favored account (Roth IRA is not applicable), starting in 2020, the required age for taking distributions increases from age 70½ to age 72. If you have a high-value of tax-deferred savings and reach 70½ after 2019, the extra time to grow your investment could work to your advantage. Also, traditional IRA holders will be able to contribute to their IRA past age 70½ without restrictions.
A significant consideration in the new law that affects estate planning is the inheritance of an IRA or another investment account(s). The SECURE Act will require that most non-spouse inherited IRAs be fully withdrawn within ten years from the death of the original owner. This decision may not be an amicable change to anyone who had planned to pass down significant assets to a child from their IRA or similar accounts. Before this, the withdrawal amount could be “stretched” over the beneficiaries’ expected lifetime. You will want to discuss this with your estate planning advisor to see if any strategic adjustments need to be made to protect the transfer of wealth.
A welcome bonus of the new law is for expecting parents. The SECURE Act will let new parents make an aggregate 401(k) withdrawal in the first year of up to $5,000 without the 10% penalty. And when those babies grow up and go to college, they can use a tax-advantaged 529 account (that was smartly setup) for their qualified student loan payments, up to $10,000 annually. Always confer with your adviser before making a 401(k) withdrawal so there is a clear understanding of why it’s happening, and to ensure it is processed correctly.
This was just the broad strokes of the new law. There is more information to consider on the areas mentioned and other provisions not included. Before making any changes to your financial plan, speak with a financial advisor that understands the timetable of the new law, it’s implications, and who qualifies for what.
The downstream effects a new law can have may be frustrating for some and embraced by others. Regardless, it serves as a great reminder of why it’s important to have a reliable and trustworthy advisor by your side. We never know when things will change outside our control. Financial planning is a lifelong journey and you have to be ready to make necessary adjustments. A dynamic wealth management strategy laid out with an experienced adviser can help grow and protect long-term wealth and takes into account the many factors that (could) affect it.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought