As you may already know, the $1.4 trillion spending bill Congress recently approved, and which took effect on January 1st of this year, includes the bipartisan retirement bill known as the SECURE Act (Setting Every Community Up for Retirement Enhancement). This Act is arguably the most sweeping change to retirement plans since 2006 when Congress approved the introduction of automatic enrollment and the use of target date funds. The SECURE Act includes a number of features and rule changes designed to address several major retirement concerns shared by most Americans:
Longevity Risk
The growing likelihood that retirees will outlive their assets because many now live 25 or more years in retirement – far longer than many originally anticipated.
Lack of Access
Many employees, particularly those employed in a part-time capacity or employed by smaller employers, lack access to a 401k or other type of employer-sponsored retirement plan.
We briefly discussed the Secure Act last month in our quarterly publication, but, wanted to provide you with some more in-depth information as it is quite likely at least some portions of this Act will directly impact you. It is also possible this Act will necessitate a review of your retirement account beneficiary designations and your trust documents (where your trust is listed as the beneficiary of your IRA).
Set forth below are some of the key provisions designed to combat these concerns. Please note it is possible that some or all of these may apply to you!
- In light of the major advances in life expectancy over the last 50 years and the enhanced quality of life for many as they age, growing numbers of Americans are opting to continue working well past traditional retirement age. For some, the extra years of working are a financial necessity while others voluntarily choose to continue working. In order to address this new reality, the Act extends the contribution age limit and the mandatory age at which required minimum distributions (RMDs) must begin.
For example, beginning in 2020:
- Contributions to traditional IRAs after age 70½ are no longer prohibited so long as you have earned income from employment. (For 2020 and assuming you are 50 or older, you are allowed to put up to $7000 in your IRA account so long as you have adequate earned income.)
- The unemployed spouse of an employee who is still working can also continue to put money away in his or her spousal IRA after age 70½ – up to $7000 for 2020 provided certain conditions are met.
- The age when you must begin taking an annual required minimum distribution (“RMD”) from your IRA is now 72 rather than 70 ½. This gives aging workers and their spouses more time to build and grow their retirement savings as well as more time to rollover assets from traditional IRAs to Roth IRAs without having to simultaneously contend with taking RMDs.
- The Secure Act also reduces the ability for IRA beneficiaries to stretch out the tax-sheltered benefit of the account from one generation to the next. Beginning in 2020, most IRA beneficiaries (other than surviving spouses, minor children and those less than 10 years younger than the deceased IRA owner) will be required to take the entire amount they inherit out of the IRA within 10 years of the IRA owner’s death.
- Other provisions of the SECURE Act are intended to help expand plan access to more employees and encourage the addition of investment options designed to generate a lifetime income stream in retirement.
For example:
- Employers are now required to allow all part-time employees who have completed at least 500 hours of service for three consecutive years and who are age 21 or older to participate in their company’s retirement plan (401k or 403b plan) except in the case of collectively bargained plans.
- Employers also now have the ability to band together to create a single retirement plan known as a Multiple Employer Plan (MEP). This should allow more small employers to offer retirement plans as they will no longer have to create and run a plan all on their own. The previous requirement that employers share some sort of common interest (e.g., members of the same professional association) to create a joint plan has been eliminated.
- It is also now easier for employers to offer annuities as an investment option inside their retirement plans. Additionally, employers must now provide a disclosure to plan participants illustrating how much lifetime income could be generated if their entire account balance were used to purchase a single lifetime annuity or a qualified joint and survivor annuity for them and their surviving spouse. This is meant as a yearly progress report to show employees how their current savings might translate into a monthly income stream in retirement.
- Lastly, the Act strives to afford plan participants with a bit more flexibility in accessing their funds in hopes of encouraging greater plan participation. A new exception to the 10% early distribution penalty has been added to retirement accounts. Individuals may now make a penalty-free withdraw of up to $5,000 to help cover childbirth or adoption expenses if made within a one-year period of the child’s birth (or legal adoption) date.
In an attempt to address a number of growing challenges and concerns inherent in our retirement savings system, the SECURE Act has introduced a number of major changes which will impact both individuals and employers for years to come.
If you are a retirement plan participant or an IRA-holder and you are interested in exploring ways to benefit from these new provisions, please talk to your BLB&B advisor. If you are an employer concerned about what plan updates may be needed to comply with this new law, please contact Ed Barnes or Brianna March of BLBB Retirement Plans at 215-643-9100 (https://blbb.com/blbb-Retirement-plans)
The ideas provided herein are for educational purposes only. BLB&B Advisors recommends you consult an attorney, accountant, tax professional, or other appropriate industry professional prior to implementing any of the ideas contained in this material.