The 2020 New Year brought with it major changes to IRA’s, 401(k)’s and retirement planning generally for millions of Americans. The SECURE Act, also known as Setting Every Community Up For Retirement Enhancement Act, was one of the few noteworthy changes of 2019 in the financial services industry, passing the U.S. House and then the Senate in the last few weeks of the year. While hailed by many, it has received mixed reviews. Here are some reasons why. Note that this column is a followup to a prior column of mine that ran July 2 and provided a “preview” of things to come.
The SECURE Act would move the dial from 70 ½ to age 72 for required minimum distributions. If you are already over the age of 72 and collecting required minimum distributions from your IRA, it makes no difference but if you are under the ages indicated you have more time before needing to withdraw from your own retirement account (and pay taxes on the withdrawal). The age is extended from age 70 ½ to age 72.
SECURE would allow contributions to traditional IRA’s after age 70 ½. Recognizing that many Americans now work after age 70 ½, if you are still working you can continue to contribute to a traditional IRA indefinitely. One question you might ask is why would you contribute to a traditional IRA if you can continue to contribute to a Roth. With a traditional IRA after age 72 you would start to withdraw. A Roth is not so limited and allows your funds to grow tax free. However, the traditional IRA does give a tax deduction in the year the contribution is made.
With some exceptions, the planning technique known as a “stretch IRA” is largely eliminated. Stretch IRA’s have been a popular planning tool especially for parents and grandparents who would like to see their IRA’s and other tax qualified funds extended through the generations. When funds remained in IRA’s on death of the original owner, beneficiaries have been able to “stretch” their required minimum distributions (and taxes on those distributions) essentially through their own lives and potentially through the lives of their beneficiaries (think parent to child to grandchild) thereby delaying repayment of taxes to the government. Under SECURE, except for spouses, disabled children and a few others, the maximum allowable period before total distribution of IRA’s and similar tax qualified funds is ten years. Several authorities have noted this drastic change might require relooking at estate plans especially those involving trusts that might hold tax qualified funds.
Annuities may be used as investments in 401(k) and similar funds and employers/providers are given legal protection. This is another controversial aspect of the Act. It continues a movement toward protection from legal liability and from fiduciary standards. On the one hand greater flexibility is encouraged in plans. On the other it appears the employee would bear the risk of failure if an insurer goes under. There is no easy answer.
The Act encourages Multi-Employer Plans. For small employers that are intimidated currently from offering their own 401(k) plans, the Act is intended to encourage and somewhat simplify the process of establishing multi-employer plans. The idea is that if several small employers can join together they would be incentivized to offer plans. This has yet to be tested but is a possibility.
What the Act does not address. The SECURE Act attempts to address some of the issues affecting retirement savings in America. It offers a major bonus to the insurance industry with annuities but has been described as nibbling around the edges of some major retirement problems. As I previously noted, one analysis in Forbes stated the issue this way: “The major issues facing retirement security for most Americans still come from Social Security funding issues, rising health care costs through skyrocketing drug costs, strains on Medicare and Medicaid, and – with roughly one-third of the American population not really saving for retirement – small modifications to savings plans likely won’t help this group.” “8 Major Ways The SECURE Act Could Impact Your Retirement Plan,” Jamie Hopkins, Contributor, May 24, 2019.
Only time will tell if these modifications cause Americans to save for retirement and ultimately make them feel more SECURE.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.