The Setting Every Community Up for Retirement Enhancement (SECURE) Act recently took effect on January 1, 2020. The stated purpose of this legislation is to improve America’s retirement system by creating more options to save for retirement and to make it easier for businesses to offer retirement plans to their employees.
This legislation was spurred by the widespread lack of preparedness surrounding retirement. According to a 2019 Bankrate survey, over 20 percent of Americans are not saving for retirement. And according to a 2019 Federal Reserve survey, 25 percent of adults who are not yet retired have no savings whatsoever. This problem is exacerbated further by the lack of access many people have to retirement plans. According to a survey by the Bureau of Labor and Statistics, 42 percent of employees in the private sector do not have access to a retirement plan. These numbers drop even lower for part-time employees and those working in small businesses.
What is the SECURE Act?
Overall, the SECURE Act seeks to improve these numbers and ensure that more Americans have enough assets to last throughout their lifetimes. Although there are 29 provisions in the SECURE Act, here are the most significant ways the Act can affect your retirement:
- Raises the age requirement for required distributions – Retirement plans like 401(k)s and IRAs help Americans save for retirement with the added bonus of saving money on taxes. These plans defer taxes generated in the account until money is withdrawn upon retirement, allowing the accounts to grow tax-free. However, required minimum distributions (RMDs) were implemented to prevent people from deferring taxes on retirement savings forever. The SECURE Act raises the age at which people must withdraw minimum distributions from 70½ to 72 years old. This gives people extra time to grow their accounts without being drained by taxes.
- Allows workers to contribute to their IRAs after turning 70½ – Before the SECURE Act, people were not permitted to make contributions to an IRA after reaching age 70½. Similar to RMDs, this limit was Congress’s way of preventing people from adding to their retirement accounts and reaping the tax benefits years after they already retired. Lawmakers did not foresee people working well after 70½, which is a reality for many Americans today. This update to the law allows these late retirees to save and realize these tax benefits as intended.
- Gives access to 401(k)s for part-time employees – Prior to the passing of this legislation, employers could exclude part-time employees from eligibility for a 401(k) plan. Now, long-term, part-time employees who work at least 500 hours in at least three consecutive years are eligible to participate in their employers’ 401(k) plans. This is a huge advantage to the growing number of older Americans seeking part-time employment, rather than retiring completely. The SECURE Act seeks to align more with the times, as more people enter retirement gradually.
How does the SECURE Act affect beneficiaries?
The downside of the SECURE ACT is that it has done away with “stretch” provisions for beneficiaries of 401(k)s and IRAs. Before this law took effect, if an IRA was left to a beneficiary, he or she could “stretch out” the required minimum distributions over his or her lifetime, which, in turn, would allow the extension of tax benefits of the retirement account.
The new law precludes most beneficiaries from doing this by requiring them to distribute the entirety of their inherited accounts within 10 years after the owner’s death. There are a few beneficiaries exempt from this 10-year distribution rule including:
- A surviving spouse,
- Minor children,
- The disabled,
- The chronically ill, or
- Someone who is not more than 10 years younger than the decedent.
Still, many non-spouse beneficiaries will be forced to take distributions within 10 years.
This new provision will require beneficiaries of traditional IRAs to pay income taxes sooner than they, or their benefactors, may have planned. This may be life-altering for many who have relied on the ability to stretch these tax benefits.
The SECURE Act may make Roth IRAs and Roth conversions from traditional IRAs more popular for big savers who want to reduce future tax bills for themselves or their heirs. Roth IRAs and conversions usually trigger a big tax bill up front (you pay taxes now rather than at retirement). However, once funds are inside a Roth IRA, future withdrawals are tax-free and there are no required minimum distributions forcing owners to take money out of their retirement account at a certain age. This allows more time for the account to keep growing and a larger amount to pass on to heirs. Still, it doesn’t always make sense to pay a lot in taxes now if you can access your money at a lower rate later (many folks are in lower tax brackets after retirement). You should consult a tax advisor or attorney regarding your situation before making any changes to your retirement accounts.
What can you do?
Given the impacts of the SECURE Act on retirement, it is essential to review your retirement planning so you can take advantage of the benefits of the new law and protect yourself against the potential drawbacks. It is also important to review the beneficiaries of your retirement accounts and consult a professional if any changes in your estate planning are needed. If you have any questions about the SECURE Act, or would like to make changes to your estate plan, contact us for further assistance or to make an appointment with an attorney today.