Dear Clients and Friends,
In late December, several long overdue changes to the governance of IRAs were signed into law. The “SECURE Act” (Setting Every Community Up for Retirement Enhancement Act) makes retirement saving easier, cheaper, and more accessible for all of America’s workforce. The most significant change, for which we have received the most questions, pertains to the age at which IRA owners must start receiving distributions. While there are a lot of positive changes included in the act, there are some potential negative consequences that savers should be aware of. For this weekend’s reading, we’d like to look at some of the major changes and how they might affect retirement savers.
Benefits for Retirement Savers
Later RMDs – Previously, once you reach age 70 ½, the IRS requires you to begin withdrawing a certain amount from your IRA and paying income taxes on the distribution. The SECURE Act pushes this back to age 72, giving IRA owners 1 or 2 more years of tax deferred growth before having to take distributions.
Age Limit – Prior to the SECURE Act, once you reach age 70 ½, you may no longer make contributions to an IRA. Under the new law, anyone who has earned income may continue contributing to an IRA, regardless of age.
Part-Timers Gain Access – Under the SECURE Act, retirement plans beginning on or after January 1, 2021 must allow workers who log at least 500 hours per year for 3 consecutive years to participate in the plan. This used to be 1000 hours and one year of service. While they will not be required to offer matching contributions, it does open the door to retirement plans for part-time workers.
529 Distributions for Student Loans – The SECURE Act will now allow 529 plan owners to make qualified distributions (up to $10,000 annually) for qualified student loan repayments. 529 savers often ask us what happens if there is money left in their 529 plan after[AK1] [DL2] college expenses are paid for. While this is not typically a material concern of ours for a variety of reasons, this new provision further decreases the need to worry about overfunding a 529 plan.
Benefits for Small Businesses
Tax Credit – The SECURE Act increases the tax credit available for small businesses when starting a new retirement plan. In 2019, roughly only half of people employed by a small business with 50 or fewer employees had access to retirement benefits. This change reduces one of the hurdles for small businesses interested in establishing a qualified retirement savings plan by offsetting startup costs.
Generally speaking, all of these changes benefit the American workforce. While some analysts debate how impactful these changes will be, the Act was viewed by congress as an improved incentive for workers to save for retirement, and therefore had bipartisan support. However, not all the SECURE Act’s provisions are beneficial. Next, we will look at two of the Act’s potential drawbacks.
Goodbye Stretch IRA
Under previous law, non-spouse beneficiaries who inherited assets in qualified accounts, such as IRAs or 401ks could “stretch” required distributions over their lifetimes, spreading out their tax burden over many years. The new law requires a non-spouse beneficiary who is more than 10 years younger than the original account owner to distribute funds over a 10-year period. This is expected to raise the tax burden in almost every instance. Admittedly, qualified accounts are intended to be tax saving vehicles for their original owners, not their heirs, so it’s hard to be too upset over this change. Still, it could potentially warrant a look at a retiree’s estate plan, especially for a single or widowed retiree with adult children in a high tax bracket.
Annuities within 401ks
The final provision we will discuss is that the SECURE Act opens the door for more employers to offer annuities within their retirement plans. While the idea of offering more options seems like a good one on the surface, annuities are complex, often misunderstood products. Incorporating them into 401k plans will leave some of the least experienced investors susceptible to their misuse. While we do use annuities in certain circumstances here at MORWM, this provision is probably the most controversial within in the Act and any saver who plans to use an annuity within a 401K should conduct substantial research and consult a financial professional prior to doing so.
While there are other, less impactful changes included in the SECURE Act, this article covers the most significant. The exact efficacy of the Act remains to be determined; however, we see this as a positive change helping more workers utilize a retirement saving plan and increasing affordability among small business to provide a retirement plan. In addition, given the ever-growing life expectancy, the delay in age for IRA/401k required minimum distributions is a long-awaited improvement.
If you have any questions about how the Act may affect you personally, don’t hesitate to reach out to us. With that, we wish you all a wonderful weekend!
Daniel Levinson, CFP®
Financial Planning Associate
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930.8303 | c: 856-906-4888 | f: 267.284.4847 |
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