What You Need to Know About the Secure Act
The largest overhaul to retirement plans since 2006 is complicated
The Setting Every Community Up for Retirement Enhancement Act – the SECURE Act – became law on December 20, 2019.
Incorporated into a broader 2020 fiscal year appropriations bill, the SECURE Act is aimed at helping Americans more easily participate in tax-advantaged retirement accounts as well as helping ensure that older retirees do not outlive their assets.
But like any changes to the rules on retirement, investors should study the details and potential implications before blindly adopting them.
The Retirement Problem
The challenges faced by our retirement system are well documented, from worries about Social Security’s reliability to the fact that most of us don’t save enough for retirement.
Sadly, according to the U.S. Bureau of Labor Statistics, just more than half of the American adults (55%) even participate in a workplace retirement plan, like a 401(k). i And the ones who do participate are usually significantly underfunded.
To underscore how underfunded our 401(k)s are, financial-services firm Vanguard announced that its research showed that those 65 years and older had median 401(k) balances of less than $60,000.
The SECURE Act was designed to address these concerns by encouraging more employers to offer retirement plans by lowering costs and reducing some of the risks.
Key Provisions of the SECURE Act
While the SECURE Act contains 29 provisions aimed at helping us better save for retirement, here are a few of the highlights:
· It offers tax incentives to small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer
· It allows employers to join with other companies and offer joint-retirement plans, which should help keep costs down
• It allows many part-time workers to participate in employer-sponsored retirement plans
• It creates a new early withdrawal penalty tax exemption of up to $5,000 from an IRA to use for childcare costs
• It pushes back the Required Minimum Distribution Age from 70 ½ to 72
• It allows for the inclusion of more lifetime-income options, including annuities ii
Not All the Provisions are Awesome
While many suggest that the SECURE Act is the most significant overhaul to retirement planning since the Pension Act of 2006, a few provisions are giving financial professionals pause. The two big ones are about annuities and whether certain provisions of the Act end up being a tax increase.
Annuities. The SECURE Act creates new rules that expand the lifetime-income options – including annuities – within retirement plans. But investors would be wise to think more than twice before buying an annuity within their retirement plan.
For one thing, the costs of annuities are generally high. But maybe more problematic than the high costs is that the trustees of your retirement plan will not have the same fiduciary duty when they select annuity providers. iii While they will still have fiduciary responsibility for selecting the mutual funds in the plan, the SECURE Act only requires the trustees to collect the insurance company information, not perform any real due diligence. And that could present some challenges down the road for employees. iv
Tax Increase? Many financial professionals are warning that specific provisions of the SECURE Act will result in a tax increase for some. And the truth is, that will happen. It will happen because one of the main parts of the SECURE Act changes the “stretch” tax provisions that allow inherited IRAs to be stretched out over the lives of multiple beneficiaries.
So, going forward, the tax increase won’t come from the account holders directly but will impact those who inherit retirement accounts because the tax bill will be paid by those future heirs when they withdraw money out of inherited retirement accounts over a now-condensed 10-year period.
Pay Attention to the RMD Rule Too
Retirees close to the Required-Minimum-Distribution Age need to be careful, too; failing to withdraw your RMD will result in a hefty penalty – possibly up to a 50% tax on the amount not distributed as required.
If you turn age 70½ in 2020 or later, you don’t have to start taking RMDs until age 72. v
Start Planning Now
The new SECURE Act does change many of the rules surrounding retirement plans; while many of them are simple, others are very complex. i Table 1. Retirement benefits: Access, participation, and take-up rates (bls.gov) ii What Is the SECURE Act and How Could It Affect Your Retirement? (investopedia.com) iii Are Annuities Riskier Without the Fiduciary Rule? (investopedia.com)
Talk to your financial professional to make sure you understand the new rules and potential implications.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
This article was prepared by RSW Publishing.
LPL Tracking # 1-05321435
iv How The SECURE Act Impacts Annuities In 401(k)s And What Still Needs To Be Done (forbes.com) v Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service (irs.gov)