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You may have missed the news — buried in a much bigger federal spending bill and passed in the thick of the holiday season — but after months of nearly bringing it to the finish line, it’s now official: On Friday, December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.
The SECURE Act provides a mixed bag of incentives and obligations for retirement savers and service providers alike. Its intent is to make it easier for families to save more for retirement.
That said, “easier” doesn’t necessarily mean less complicated. As your fiduciary financial advisor, we’re here for you! To jump-start the conversation, here is an overview of the most significant changes we’ve got our eye on as the SECURE Act starts rolling out in 2020.
As you might expect, all the points below come with detailed exceptions and disclaimers that may influence how they apply to you. Before proceeding, please consult with us, as well as with other appropriate professionals such as your estate planning attorney.
Compared to previous generations, more Americans are living longer, remaining employed into their 70s, and shouldering more of the duty to fund their own retirement. As such, the SECURE Act includes several incentives to start saving sooner and keep saving longer.
Making it easier to pay off student debt is also expected to benefit your retirement saving efforts.
Even if you are not a business owner, it’s worth being aware that employers in general—and small businesses in particular—are being recruited to help employees save for retirement.
So far, we’ve been covering the “carrots” meant to encourage retirement saving. There’s also an important “stick”: The SECURE Act eliminates the use of stretch IRAs for most beneficiaries, which could impact your current or future estate planning. This is presumably meant to offset the expected reduction in federal income tax collections, due to increasing the RMD age to 72.
To be clear, a stretch IRA is not a formal account type. It’s a practice that enabled you to bequeath your IRA assets to your heirs, who could then keep the inherited account intact and tax-sheltered, essentially throughout their lifetime. With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within a decade after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.
A number of articles in the SECURE Act are aimed at helping you not only save for retirement but feel more confident you won’t run out of money once you get there. As such, the act is making it easier for employers to add lifetime income annuities to their plans as a distribution option for employee participants.
The SECURE Act also has established new reporting requirements for your employer. The new report is meant to make it easier for you to envision how much of a lifetime income stream you can expect if you decide to annuitize your accumulated retirement plan assets. This reporting requirement does not take effect until a year after the Department of Labor has established a set of rules for your employer to follow when creating your report … which could take a while.
Bottom line: We applaud the overall idea of creating a secure retirement, but there are many ways to go about achieving it. If you are considering annuitizing some of your retirement assets today or in the future, we hope you’ll be in touch, so we can explore the possibilities with you in the context of your own circumstances.
There are quite a few other components to the SECURE Act. Some of them are aimed at managing access to your retirement savings for pre-retirement spending needs. For example, the SECURE Act now allows parents to withdraw up to $5,000 from their IRA without penalty (but with potential income taxes) for birth or adoption events. It also now prohibits plan providers from allowing participants to take out 401(k) plan loans using credit cards.
As you might expect, we prefer ensuring your financial plan budgets for upcoming spending needs without having to tap into your retirement reserves. If it might not, let’s get together soon and plan accordingly.
What can we expect moving forward? Not every component in the SECURE Act is effective immediately. Some may continue to come into sharper focus over time. As such, we may recommend some changes to your financial planning in the near future while other steps may be required or desired over time.
This is to be expected, given the number of reforms enacted in this sweeping bill. Come what may, we look forward to being by your side throughout. As we embark into 2020 together, we will be connecting with you to ensure that your retirement planning complies with and takes optimal advantage of the SECURE Act of 2019.