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What is the SECURE Act?

How does the SECURE Act benefit me?

December 22, 2019

Stacy Marcus 

On December 20th, President Trump quietly (the media was distracted by his impeachment) signed into law the most significant retirement legislation since the Pension Protection Act of 2006. The Act also has non-retirement provisions of importance to a particular their key audience. 

From student loan repayment to inherited IRAs we highlight the good, the bad & the ugly.

What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement Act is legislation designed to make it easier for people to save (more) for retirement. 

Is the SECURE Act a good thing?

The answer depends on who you are and what you are trying to accomplish. If you are inheriting an IRA you probably do not think so, but for people seeking to save (more) for retirement it has many benefits. 

 

To make it easier for you to assess the personal impact of the SECURE Act

we present provisions from the perspective of the key audience.

 

The Good 

Saddled with Student Debt 

  • $10,000 from a 529 plan may be used without penalty (10%) to pay down student debt.

Having or adopting a baby 

  • $5,000 may be withdrawn from each (married) parents’ 401(k) plan without penalty for costs. 

 

TIP: The funds in 401(k) plans are very valuable – they must be earned and may benefit from an employer match. The decision to withdraw funds early should be made prudently. If possible, funds should be replaced quickly.

Graduate or Post-Doc Student

  • Fellowship and stipend payments will be treated as compensation enabling IRA contributions.

 

Nearing 70 and want to continue saving for retirement

  • There is no longer a maximum age for contributing to an IRA, so you can continue past 70-1/2

 Turning 70-1/2 in 2020  

  • Required minimum distribution (RMDs) from 401(k) plans and traditional IRAs now begin at 72.

Small business owner

  • Increase in tax credit to $5,000 (from $500 ) for 50% of retirement plan startup costs

  • $500 tax credit for plans that include automatic enrollment.

  • From 2021, unrelated employers can group under a “pooled plan provider” to reduce administrative costs.

Part-time Worker

  • Starting in 2021, employees who work 500 hours per year for three (3) consecutive years are eligible to participate in their employer’s 401(k) plan.

The Bad  

Inheriting an IRA

  • Non-spouse beneficiaries have lost the option of lifetime draw down of the inherited account.

  • Beneficiaries must draw down- and pay income tax on the funds, within 10 years of inheritance.

The Ugly 

Annuities as a retirement plan investment option

  • Employers will be permitted to offer annuities in their retirement plans with the Duty of Care transferred to the insurance company selling the product.

TIP: The promise of guaranteed lifetime income does not negate the fact that annuities are a tricky investment product.

Some annuities are simple and low-cost. Others have high expenses, complex fee structures and myriad rules. Expenses are often wrapped (hidden) in the product (mortality expense, surrender charge), and elective options can be complex with additional costs, restrictions and severe penalties for wrong steps. The jury is out on placing the Duty-of-Care with the selling insurance company versus employers.

Make certain any annuity option proposed works for you. Do your due diligence (research and evaluation of suitability for your personal circumstances) and don’t judge an annuity based on its marketing slogan or materials.  

Critical but Delayed

For me personally, the most valuable benefit for peace of mind is the Lifetime Income Disclosure Statement. Unfortunately, this will not be available for a few years.

401(k) Plan Participants wanting to know what their balance number actually means

  • The SECURE Act requires 401(k) plan administrators to provide each plan participant with an annual “Lifetime Income Disclosure Statement".

 

This Statement illustrates what your monthly income could be if your total 401(k) account balance was used to purchase an annuity. The estimated monthly payment amount is NOT binding but it can be helpful in determining if you can support your current or desired lifestyle  if you were to stop working.  

Unfortunately, this SECURE Act requirement will not go into effect until one year after the IRS issues interim final rules, creates a model disclosure statement or releases assumptions that plan administrators can use to convert account balances into annuity equivalents, whichever is latest.

 

Bottom Line

The Act has a lot to offer. It also requires serious consideration and important family discussion on legacy planning and strategies to minimize family tax burdens particularly with respect to inherited IRA (Individual Retirement Accounts). 

TIP: When making financial decisions remember to balance spending money on the quality of your life today and investing for the quality of life you are looking forward to.

And if you’re a woman don’t forget to plan for an extra 5-8 years of life!

 

When you want to do-it-yourself but not do-it-alone and want to be confident you have asked yourself all the key questions to account for your unique planning needs, we're here to help

 

 

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