8 Ways The SECURE Act Changes Financial Planning
January 8, 2020 • Published
The SECURE Act went into effect on January 1, 2020 and brings significant changes for retirement and other financial planning. Here are the notable provisions and takeaways from the SECURE Act that you need to know.
1) Age Limit Removed For IRA Contributions:
There is no longer an age cap on contributions to a traditional IRA. Traditional IRAs will now be aligned with Roth IRAs. Before the SECURE Act, there was an age cap for contributing to a traditional IRA of age 70 ½. Individuals who continue to work can continue to save for retirement, regardless of their age.
2) Required Minimum Distribution (RMD) Age Extended to 72:
The SECURE Act delays RMD's from retirement accounts until age 72 (up from 70½). This applies to all those who are not currently in RMD status. Anyone who is over 70½ must continue taking RMD's. “This extension means clients have a longer time horizon potentially for investments held in their IRAs . . . by delaying the requirement to realize income from an IRA at age 70 ½, this could have implications for how clients should optimally invest the rest of their balance sheet to produce income (specifically, their taxable accounts)”, states Tim Lofton, from Ohio based Cornerstone Consulting and CEO of The Retirement Blueprint™.
3) Penalty-Free Withdrawals For New Parents:
The SECURE Act now allows new parents to take penalty-free distributions from their retirement plans within a year of the birth of a child or adoption to cover related expenses, up to $5,000. While income taxes will still apply to withdrawals from a traditional retirement account, this allows new parents the ability to pay those expected, or unexpected, first-year child expenses.
4) Student Loan Repayment Through 529 Savings Plans:
Individuals can also withdraw up to $10,000 from 529 savings plans to make student loan payments. This is another step forward in helping to manage the growing costs of college education and leveraging a 529 plan to facilitate it.
5) Retirement Plan Conversion To Lifetime Annuity:
Retirement accounts could be converted to a lifetime annuity. The SECURE Act creates a safe harbor for employers to offer annuities in their 401(k). The Act makes it easier for plan sponsors to offer annuities inside qualified plans subject to ERISA’s fiduciary requirements. “We think this is a good thing since it will make it easier for investors to hedge longevity risk while still investing in a globally diversified portfolio,” states Lofton.
6) Lifetime Income Disclosure For Defined Contribution Plans:
Employers are required to disclose to employees the amount of sustainable monthly income their balance could support in their 401(k) statements. This may create another helpful educational resource as financial advisors guide their clients through retirement.
7) Increased Access To Retirement Plans For Small Business Employees:
The SECURE Act expands the ability for small businesses to offer multiple employer plans. It also allows small-business employers to join with other employers to set up and offer 401(k) plans with fewer liability concerns and less cost. This is helpful as small businesses typically do not offer retirement savings options, so the hope here is that more small-business employees will be able to take advantage of employer-sponsored plans.
8) Elimination Of The Stretch IRA:
A key change in the Act is the elimination of the “stretch” IRA from inherited retirement accounts. This means that a beneficiary can no longer stretch the distributions over his or her lifetime. Instead, all retirement assets must be distributed out of the account within 10 years of the account owner’s death. There are some exceptions for a surviving spouse, minor children, chronically ill, disabled, and anyone not more than 10 years younger than the account owner. This new rule applies to all retirement accounts inherited on or after January 1, 2020.
The elimination of the stretch presents significant changes, including the need to review current estate plans to avoid unintended consequences. Clients may also want to look at other options for giving retirement accounts to their beneficiaries, such as Roth Conversions for tax-free inheritance, a charitable trust as a way to regain the stretch IRA, and combining charity giving and the use of life insurance to give tax-free assets to their children.
The good news is that the stretch still applies to inherited IRAs that were effective in 2019 or before.