To avoid another government shutdown, Congress passed a bipartisan spending bill in December. Tacked to it was a bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act that Barron’s describes as “the biggest retirement legislation in a decade.”
Many financial experts were surprised that the SECURE Act, which was backed by the insurance industry and lobbyists, was included in the bill. Earlier in 2019, the House passed it with a 417-3 vote, but several Republican senators put a hold on the bill and discussion on it reached a stalemate. While some lawmakers have raised questions about the SECURE Act and offered amendments, it generally has enjoyed bipartisan support.
With President Trump’s signature on the bill on Friday, December 20, the SECURE Act was signed into law. The legislation will reform the way that Americans save for retirement. Here are five key changes you need to know about.
Minimum age raised for RMD
Currently, people who own IRAs must begin taking required minimum distributions, or RMDs, when they become age 70 ½. The SECURE Act raises that age to 72. That means people who turn age 70 ½ in 2019 will have to take out their first RMD by April 1, 2020. Those who turn 70 ½ in 2020 or after can wait two years to withdraw their RMD.
Some analysts believe this change will significantly benefit retirees. Postponing RMD allows an IRA balance more time to grow through compounded interest and through additional contributions.
Age cap removed for IRA contributions
The SECURE Act will change a rule that restricted people from contributing to an IRA after they turned age 70 ½ (this restriction did not apply to Roth IRAs). Under the SECURE Act, there are no age limitations for contributing.
This change could help people who work into their 70s or beyond, allowing them to continue to make contributions to their IRA as long as they work. Under the SECURE Act, people will have more time to increase or catch up on their retirement savings. Coupled with the new rule increasing the age for RMD, people could significantly increase their retirement savings in those additional work years. According to research from experts at Stanford University, Cornerstone Research, George Mason University, and Financial Engine, putting off retirement for one year will benefit you 3.5 times more financially than saving 1% of your income over 30 years.
Benefits expanded to include part-time workers and more
With this change, the SECURE Act will respond to a changing economy with an increasing number of people working “gig” and freelance jobs. The act will allow many more employees who work part-time to save for retirement through their employer.
The SECURE Act also will allow people to withdraw as much as $10,000 from their 529 plan to pay back student loans. This move helps graduates because they will pay less interest as they repay their debt quickly and make them more financially secure as they enter the working world and begin families. As the nation’s student debt burden has surpassed $1.5 trillion, employers are looking for ways to help their workers manage this debt.
Parents of newborns, either through birth or adoption, will also get help through the SECURE Act. The act makes new parents eligible to withdraw $5,000 from their IRA, without penalty, to help pay the cost of delivery or adoption.
The end of “stretch” IRAs
Stretch IRA rules have allowed families to pass IRAs through generations tax-free. Under these rules, inherited IRAs kept their tax-deferred status when passed to non-spouse beneficiaries (typically children and grandchildren), allowing the IRA to grow without paying taxes. Stretch IRA rules, which applied to any type of IRA, meant that when a young beneficiary inherited an IRA, taxes and required distributions could be put off for decades.
The SECURE Act gets rid of these rules, and now non-spouse beneficiaries of an IRA must disperse its balance within 10 years. There are exceptions for surviving spouses, minor beneficiaries, beneficiaries who are disabled, beneficiaries who are chronically ill, and beneficiaries who are within 10 years in age of the account owner.
The primary beneficiary of this rule change? The U.S. government. Called a “tax acceleration,” eliminating stretch IRAs is estimated to generate about $15 billion in tax revenue in the next 10 years. It also can significantly change estate planning, as it eliminates a shelter for inherited income.
More annuities in 401(k) plans
While investors have always had the option of including annuities in their 401(k) plans, right now employers are responsible for making sure they are a good choice for their employees’ plans. Under the SECURE Act, insurance companies will become the decision-makers on annuities. Critics say this is a boon for the insurance industry, which sells annuities and lobbied for the passage of the SECURE Act.
Supporters of this rule change argue that annuities can be a sound investment choice because they provide a guaranteed income over the life of the retiree. However, because annuities are complicated investment products, investing in the wrong ones could mean large financial penalties and fees.