The SECURE Act signed into law last week is the most important retirement legislation in over a decade.
The overall goal of the SECURE Act was to make saving for retirement easier and more affordable.
One major change is that the age that individuals must start taking their minimum distributions from retirement accounts has been raised from 70 ½ to 72. This is important because it allows an additional 18 months for retirement accounts to grow untouched. A related change is that individuals can now choose to continue making contributions to their IRAs for as long as they have earned income. These provisions are particularly important with so many seniors staying in the workforce longer.
However, one specific provision under the SECURE Act has a significant negative impact on estate planning and retirement savings.
The SECURE Act largely eliminates the ability of individuals inheriting a qualified retirement plan from a non-spouse from stretching the distributions over their own life expectancy. Instead, they will be forced to take the funds over a period of ten years, thereby resulting in much larger required distributions that are taxable. Leaving an IRA to a younger family member, directly or through a trust, was a popular way to retain the tax-deferred status and allow the assets to grow for decades. This is no longer allowable and some individuals will want to revisit their estate plans accordingly. The tax impact can be significant as the larger distributions are taxed at the beneficiary’s tax rate and will now be more likely to be concentrated in their prime earning years. Thanks in part to the advocacy of elder law and disability groups, this provision will not apply for minors, chronically ill beneficiaries and those with special needs who will still be allowed to stretch distributions over their lifetimes.
The legislation includes a number of provisions meant to expand access to retirement accounts. It allows many part-time employees to now qualify for their employer-based retirement plans. It also allows certain graduate school stipends and foster care payments to be considered income for purposes of qualifying for retirement plans even though they are not taxable income. The SECURE Act also makes it easier for small companies to offer retirement plans and has provisions that encourage and expand auto-enrollment.
The SECURE Act also makes it easier for employers to offer annuities in their retirement savings plan.
This is not necessarily bad, as annuities can be an important piece of any portfolio. However, the SECURE Act does not include any protections to ensure that annuities that are not well-suited to seniors are not included.
The legislation has a number of lesser-known provisions addressing savings and debt. The law allows penalty-free withdrawals from qualified retirement plans for birth and adoption expenses. It also allows withdrawals from 529 college savings plans to pay off student loans. However, the new law prohibits 401(k) loans provided through a credit or debit card to discourage employees from taking loans against their retirement accounts for everyday expenses.