The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is a major federal retirement reform measure. This bill puts forth a series of revisions to previous laws governing taxes on retirement income, collection ages, and more.
While it’s not law yet, there is a lot of talk about how the SECURE Act impacts retirement planning for the average American. Investors want to know how this is going to make a difference to their portfolios, present and future. After all, there are a lot of ways in which new regulations can change existing plans for better or worse.
There are dozens of measures included in the SECURE Act, some more significant than others. Here are the ones that are most likely to make a difference to your retirement planning activities or existing portfolio.
1. Provides More Opportunities for Small Businesses to Offer Retirement Plans
Under the SECURE Act, there are more opportunities than ever for small businesses to opt into retirement planning for their employees. This bill has provisions to extend previously unreachable 401(k) sharing options for small businesses by allowing multiple small businesses to work together as a larger group and pool contributions into bigger funds. This would, in effect, give employees of small businesses retirement planning options on par with what they would see if they worked for a larger employer, provided that the owner(s) of the small business join a 401(k) pool.
Until now, small businesses have been limited in their ability to provide a variety of retirement planning options for employees, which can impact a small business’s ability to attract and retain talented employees. Options like SIMPLE IRA and SEP IRA, while adequate, don’t have the same luster as 401(k) options. As a result, many small businesses simply don’t offer retirement plans for their employees. Opening 401(k) options for small businesses can provide value for small business owners and confidence for employees at these companies.
2. Removes Age Limitations for IRA Contributions
Another impact that the SECURE Act would have is the removal of age limitations for IRA contributions. Currently, there is an age limit on IRA contribution that limits individuals over age 70.5 from contributing to IRAs. This seemingly discourages retirement savings for individuals who are approaching or past the traditional retirement age.
Removing the age limitation for IRA contributions will encourage continued IRA contribution, even into one’s 70s and beyond. Interestingly, there is already no age limit for contributions to Roth IRA accounts, so this would bring more balance for investors on the fence about IRA conversion.
3. Add Opportunities for Annuities within Retirement Plans
Provisions in the SECURE Act would provide the opportunity for 401(k) plan providers to add annuities to the 401(k) mix, further diversifying investment options for those who invest in these plans. Until now, there has been hesitation on the part of providers to add annuity options, since annuities have presented a certain level of liability when packaged as part of a 401(k) plan. However, the SECURE Act provisions remove this liability from the provider’s side, which may open more options to add annuities to the 401(k) mix.
4. Extends the Required Minimum Distribution Age
By law, you’re required to take a required minimum distribution (RMD) from certain retirement accounts by the time you reach age 70.5. Some investors don’t appreciate the constriction of this requirement, especially if they’re still working at age 70.5 or don’t plan to fully rely on their retirement savings until a later date.
Under the SECURE Act, investors will see the RMD age moved from age 70.5 to age 72. This provides a cushion for investors to add a final push of savings to their retirement accounts. Of course, if you plan on drawing from those accounts earlier than age 72, you’ll still have the option to do so.
5. Provides Penalty-Free Distribution for Certain Withdrawals
Generally, investors shy away from taking pre-retirement withdrawals from their retirement accounts because of the rate at which those withdrawals are taxed. But in some life circumstances, the future nest egg is a valuable tool that could provide some much needed relief in the short-term.
The SECURE Act, in part, seeks to answer the challenge of accessing retirement funds for certain life changes by removing the penalties associated with these withdrawals. Most notably, the SECURE Act has a provision that allows investors to take qualified withdrawals for the birth or adoption of a child. It opens up to $5,000 in penalty-free withdrawals for a qualified birth or adoption within one year of the child’s birth- or adoption-date.
6. Removes Certain Qualifications from Inherited Accounts
Inherited retirement accounts (401(k)s, IRAs, Roth IRAs) have, in the past, provided beneficiaries with the ability to withdraw funds over the course of their lifetimes. However, under provisions in the SECURE Act, these distributions would be limited to a ten year period.
While this doesn’t necessarily make a big impact for smaller inherited accounts, like 401(k)s, since they’re typically liquidated within a short period of time, it does make a difference for investors collecting so-called “stretch” benefits from inherited IRAs. In a technical sense, IRAs are not strictly retirement accounts. The rationale of the SECURE Act’s limitations is to reduce the length of time that beneficiaries can receive penalty-free inherited IRA distributions and infuse a certain amount of tax money back into the economy, by bringing back penalties for distributions taken outside of the designated decade.
So, How Might the SECURE Act Impact Your Retirement Planning
As an investor, you want the confidence that your investments are working hard for you and will one day, hopefully, help you to reach your future financial goals. With a big piece of legislation, such as the SECURE Act, on the table, there are ways in which today’s planning may not be sufficient for reaching tomorrow’s goals.
Instead of trying to work through this on your own, look to your financial advisor for information about how retirement reform might impact your bottom line. Your advisor can help you to sift through new requirements, evaluate your current accounts, and make adjustments that align you with the track you want to take.
If you have any questions about the SECURE Act or want to learn more about your retirement planning options, contact Puckett & Sturgill Financial Group today for a consultation!