HOW THE PASSING OF THE SECURE ACT AFFECTS YOUR RETIREMENT
How this law may help your retirement:
- Small businesses will be able to offer their employees 401(k) plans at a much lower cost by receiving tax credits for automatic enrollment and protections on collective Multiple Employer Plans to lower the costs of administering retirement plans
- Long-term, part-time employees will be able to receive retirement benefits
- The required minimum distribution (RMD) age at which you must begin taking distributions from your retirement plans (except for Roth IRAs), will increase from 70 ½ to 72
- The maximum age limit on Traditional IRA contributions, formerly capped at age 70 ½, will be removed
- The 10% early distribution penalty will be waived up to $5,000 from retirement plans for the birth or adoption of a child
- The 10% distribution penalty on 529 plans will be waived on withdrawals up to $10,000 for certain student loans
The Act will open up retirement savings plans for a number of employees, specifically part-timers and those who work for small businesses. This will help employees without access to retirement plans to save for retirement. Raising the RMD age will allow employees, who are either still working or have alternative ways of funding their retirement, to defer taking distributions from their IRAs until age 72. This will lower income taxes for full-time employees who didn’t require their RMD, and allow those funds to grow tax-deferred until age 72. It also increases the time frame some retirees can maximize Roth conversions by spending from taxable accounts versus IRA distributions taxed as ordinary income. Lastly, it will allow for additional years of back-door Roth IRA contributions since the age limit on Traditional IRA contributions will be removed. The waiver of the 10% distribution penalty on 529 plan loans will help ease the burden on students since loan payments weren’t considered qualified education expenses. While these aspects of the bill seem like a great way to help people save for retirement and pay down student loan debt, there are many parts of the SECURE ACT that appear designed to help other parties such as insurance companies and the Federal government.
How this law may hurt your retirement or your beneficiaries:
- The Act will relax rules on employer liability for employers who want to offer annuities through sponsored retirement plans
- “Stretch” Inherited IRA provisions will be removed and require non-spousal beneficiaries to distribute Inherited IRAs over a 10-year period rather than over their life expectancy
The SECURE ACT eliminates the employer’s liability when including annuities in retirement plans and puts the fiduciary responsibility on the insurance company to provide employees with suitable products. This creates a safe harbor for these employers to offer more financial products to plan participants without incurring added regulatory risk. The government argues that defined benefit and pension plans have all but disappeared for most employees, so allowing these products to be sold in a 401(k) plan will “guarantee income” that otherwise wouldn’t be there. This may seem like a great benefit for retirees since it provides access to other financial instruments that weren’t typically offered in the past, but it may limit access to lower cost, consumer friendly product providers.
The removal of the stretch RMD provision for Inherited IRAs will go into effect if you inherit an IRA from someone who has died on or after January 1, 2020. This change will force owners of an Inherited IRA to distribute the entire account balance within ten years of the original account owner’s passing unless they are the account owner’s surviving spouse or minor children (until they reach age of majority), a disabled or chronically ill person, or any person who is not more than 10 years younger than the original account owner at the time of death. This change will force most beneficiaries of IRAs to claim large sums of income, typically during their prime earning years, increasing the total tax owed on these Inherited IRAs. This makes Roth IRAs more valuable since distributions from an Inherited Roth IRA will be tax-free to the beneficiary.
Owners of IRAs who have “see-through trusts” named as beneficiary need to review the language of their trust document to allow for the account to be distributed over the new 10-year period. If the trust language does not provide flexibility to the trustee to abide by the new rule, it could increase taxes and penalties imposed.
As you can see, the SECURE ACT comes with some major changes to long-standing rules. The Mather Group’s wealth advisors and tax professionals are reviewing our financial planning and tax recommendations to confirm they’re aligned with the new law.
The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions expressed in this communication are based on The Mather Group’s research and professional experience and are expressed as of the publishing date of this communication. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The information and data in this communication does not constitute investment, or other professional advice.
