The SECURE Act, signed into law in December 2019, was the biggest piece of retirement legislation passed in over a decade. What is the SECURE Act? How did it impact plan sponsors? Participants? Normal people like you and me? And is it a good thing or not?
Let’s talk it through.
The SECURE Act, signed into law in December 2019, was the biggest piece of retirement legislation passed in over a decade. What is the SECURE Act? How did it impact plan sponsors? Participants? Normal people like you and me? And is it a good thing or not?
Let’s talk it through.
Welcome to Retirement Plans A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on QRPs. There are a lot of moving pieces with these plans, and the rules are complicated and complex, so we’re going to break them down into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in for good measure.
This is episode S, and we’re going to talk about the SECURE Act, the biggest piece of ret legislation in over a decade. What is the SECURE Act? How did it impact plan sponsors? participants? For normal people like you and me? And is it a good thing or not? Let’s talk it through.
The SECURE Act, short for “Setting Every Community Up for Retirement Enhancement “, is 125 pages of legislation containing 30 provisions, most of which are designed to boost retirement savings. It was signed into law in December of 2019 as part of a bigger gov’t spending package, and had what some considered some long-overdue reforms that could make saving for ret easier for you and me. We’ll highlight the 6 key provisions, and I’ll give my opinion as to the pros, cons, and reasoning behind it – I’ll leave the final decision as to whether it’s good or bad up to you.
First we’ll talk about a few provisions that give people some more options. The first pushes out the age that RMDs start to age 72. Prior to SECURE act, if you turned 70 ½ in one year, you were required to take a dist from your IRA or 401k in the following year, whether you wanted to or not. The SECURE act pushed that age out to 72, for anyone turning 70 ½ in 2020 or later. Another allows IRA contributions to be made after 70 ½, as long as you’re still working. This aligns IRA rules more closely with 401k and Roth IRA rules. A third requires 401ks to provide an option at retirement to have their balance paid over their lifetime, instead of just as one big lump sum. My opinion? These are All good things, because all it’s doing is relazing some rules and giving people more options.You don’t HAVE to take an IRA distrib at 70 1/2 any more - you certainly could if you wanted, but you don’t have to until you’re 72. You don’t HAVE to save to your IRA after you turn age 70 ½, but you could if you wanted. You don’t have to take your 401k balance in monthly payments over your lifetime, but if you’re afraid of outliving your income, this would be a big help. I think these are all good moves.
Here’s our first fun fact – Did you know that in Turkey, you can collect full retirement benefits at age 45 if you’re a man, and at age 41 if you’re a woman? You essentially need 25 years of service, and then you’re good! Their law is changing, though, by 2050 men will need to wait until age 62, and women age 61. That’s still not as bad as Iceland and Norway, where full benefits aren’t paid until age 67, with the US moving that way too.
Let’s talk about a few other provs from the SECURE act that impact individuals. Long-term, PT employees are now elig to participate in their co’s 401k. Prior to the Act’s passage, if you worked less than 1000 hours per year, you were generally ineligible to participate in your company's 401(k) plan. Now, unless it’s a union plan, ERs maintaining a 401(k) plan have to allow employees that work 500 hours over 3 consecutive years into the plan. This is great for the employees – again, it offers the option to contribute, if the ee wants to. It’s not so great for businesses, especially if there are a lot of PT workers, because that may increase their admin cost.
Another provision allows you to withdraw up to $5,000 from your ret plan upon the birth or adoption of a child. In addition, the 10% penalty tax that would normally apply from taking out money prior to age 59 ½ is waived. This one is 50/50 for me … it can be really helpful if you don’t have enough money on hand for this. But, you still have to pay income tax on the money you withdraw. You don’t have the 10% penalty, but you’ll need to put it on your taxes as income.
The SECURE act made a few updates to how 529 funds may be used. In the past, 529 funds had to be used for secondary education costs only, they were very restricted. The SECURE act allowed 529 funds to be used to pay down student loan debt, up to $10,000, and also may also be used to pay for certain apprenticeship programs. I like these provisions, personally – again, it’s giving people more options with the money they’ve saved, which in my opinion will increase savings.
Apprenticeship programs are on the rise too – in 2019, 86,000 people graduated from apprenticeship programs, and over 250,000 people entered a program! There were also over 3,000 apprenticeship programs established in 2019, over 100% growth from 10 years earlier. Being able to use 529 funds for these programs is (again, in my opinion), a great idea.
The final part of the SECURE act we’ll talk about is the elimination of the stretch IRA. What’s a stretch ira? I’m glad you asked … when someone dies, generally their 401k or IRA money goes to their spouse, and can be paid over the spouse’s lifetime. If someone else inherits that money, that person had the option to have the money Stretched out over their lifetime. Let’s give an ex – if I had a $1M IRA, and my husband and I passed away, my 2 boys would each get $500k. They’re in their early 20’s – they could have that 500k stretched over almost 50 years, paying them 10000 per year for their lifetimes. They’d report that $10k as income, and be taxed on that every year.
The SECURE Act eliminated these stretch IRAs. For IRAs inherited from the original owners who pass away on or after Jan 1, 2020, the law requires the assets to be withdrawn (and taxed) within 10 years. There are some exceptions, but for the most part, this is the new rule. Let’s go back to my example – both of my boys inherit $500k, but instead of taking 10k over 50 years, they have to take it over just 10 years – $50k each year, which likely pushes them up into a higher tax bracket. The gov’t was very clear that this was a revenue raiser, defending the change by stating that IRAs and retirement funds should be used for that person’s retirement, not as a legacy to their beneficiaries.
Is this good or bad? It’s great for the gov’t, because it means more tax dollars! But if you wanted to leave an inheritance for your kids, it’s bad for them, because they’ll pay higher taxes and their total inheritance will be less. What are some options with this, if you want to use those funds for an inheritance, for your legacy?
You can do nothing – and have exactly what you have now – pre-tax dollars, required distributions at age 72, advisor fees, and market risk depending on your investments. Your kids will pay the taxes, but they’re still getting something, so let them worry about it.
If you want to do something … you can convert your IRA to a Roth, and pay taxes on it yourself, which helps out your kids tax wise, and gets rid of the age 72 required distributions. There’ll still be investor fees and market risk.
Another option is to use your IRA dollars to buy life insurance. Life insurance is a nice safe investment, and the death benefit would likely be more than the IRA balance, which means more of a legacy. Also, if your will is set up to put the death benefit into a trust, that can be paid out over a lifetime, and isn’t subject to this new 10 year thing. So, if your focus is on a legacy, this may be a good option for you. You can’t buy the insurance within the IRA, but you CAN buy it in a 401k, if the 401k is structured the right way. This means pre-tax premiums, and an untaxed death benefit for your heirs. We call this our Legacy Strategy – give me a shout if you want to hear more about this one.
Our final fun fact –elimination of the stretch ira is expected to increase IRS tax revenues by $16 Billion dollars. With a B. Revenue raiser, indeed ….
Wrapping it all up – the SECURE act was the biggest piece of ret legislation in over a decade, providing some additional options in some cases, and eliminating some key options in others. Good? Bad? Depends on what your situation is, and where you are on your road to retirement. For better or for worse, things are certainly different – if you want to chat about how this may have impacted you and your retirement savings, let me know – happy to help.
Wanna learn more? Tune into the other a to z podcasts where we continue to break down these wonderful and complex plans into bite size pieces. Remember, how do you eat an elephant? 1 bite at a time. Have any questions? Shoot me an email at MonarchFinAdvis@gmail.com. Thx for listeining in and have a great rest of your day!