What You Should Know About the SECURE Act
On December 20th, The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, was signed into law by President Trump as part of a late-cycle appropriations bill. SECURE is the product of a bipartisan effort to improve the American retirement system and is the most significant retirement-orientated bill to pass in over 13 years.
The Act consists of 29 separate provisions, collectively aimed at improving the existing rules for qualified retirement plans and to encourage Americans to save for retirement. However, there are a few provisions that may have a larger impact than others.
There’s been a lot of news in the past few weeks about the SECURE Act, and we know it can be difficult to cut through the noise and understand how this new law will impact you in practical terms. So, we’ve put together a list of the 4 areas where we think this legislation will have the greatest impact for most people.
1. Required Minimum Distributions (RMDs)
Beginning in January of 2020, SECURE will push the age at which individuals are required to begin withdrawing money from their retirement accounts back from 70.5 to 72. Additionally, the bill will allow working individuals to continue to contribute to their traditional IRAs past the age of 70.5.
These changes acknowledge the shift we have seen in the aging U.S. workforce; driven by increasing lifespans and longer working years. By pushing the ages back, SECURE will provide individuals with the opportunity to keep their savings invested for a longer period.
These changes will only come into play for those that will turn 70.5 on or after January 1, 2020.
2. Elimination of Stretch IRAs
Historically, individuals who were designated as a non-spousal beneficiary to a 401k or IRA, were permitted to withdraw the inherited assets over the period of the beneficiary’s life. The timing and amount of the distributions was treated as an RMD and is calculated on a few different factors including the beneficiary’s age and life expectancy.
Under the SECURE act, non-spousal account beneficiaries will now be required to withdraw all the inherited assets from the account within 10 years of the life event. These changes will only impact life events that occur after December 31, 2019 and will apply to all qualified plans.
While there will not be an RMD over the period, the entirety of the account must be distributed by the end of the 10th year. For beneficiaries in their peak earning years, this change could increase tax burdens and limit the timeframe in which they can invest the assets in a tax-advantaged account.
3. Annuities in 401ks
The SECURE Act will also enable more plan sponsors to include annuities as an investment option. With the current ERISA safe harbor for Defined Contributions plans, the plan sponsor holds the fiduciary responsibility to ensure each investment option is appropriate for their employees. This has caused plan sponsors to stray away from annuities in the past, as the suitability of the products should be determined on a case by case basis. Under the SECURE Act, plan sponsors will essentially transfer this fiduciary responsibility to insurance companies for individuals that elect to invest in these types of products.
Annuities can be a great addition to some retirement portfolios, as they can provide a guaranteed source of income over the life of the individual. However, these types of products tend to be complex in nature and may have higher costs than other investment options.
4. Plan Structures and Coverage
SECURE also has the potential to expand plan coverage to smaller businesses that previously were unable to provide this benefit to employees. The Act will alleviate certain rules associated with pooled employer plans, where different plan sponsors pool together to form a single plan. There are many benefits to this approach, including cost savings and enhanced features through scale.
The first rule the Act will eliminate is the “one bad apple” rule, which meant that if one sponsor failed to meet regulatory requirements, all members of the plan pool could be affected. The next rule the Act will eliminate is the “Nexus” rule, which required that the each of the plan sponsors have a common interest or characteristic in order to pool together.
Additionally, SECURE will offer tax credits to plans that set up automatic enrollment in their retirement plans for eligible employees. This feature is an excellent way to encourage Americans to save for their retirement.