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Assessing How The SECURE Act May Impact Investing For Your Retirement

by: Alpha Gen Capital
Alpha Gen Capital
Deep Value, CFA, registered investment advisor, contrarian
Summary

The Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Many of its provisions benefit everyday investors for retirement.

However, there are several disadvantages that will increase taxes for many.

We have been following the SECURE Act for more than a year at Yield Hunting. Finally, we can report that on December 20th, President Trump signed the SECURE Act into law as part of the year end appropriations bill.

Most of these changes take place in 2020... so how will they affect you? And remember, several of them are not just for those at or near retirement. They can have a profound effect on the way we all save for retirement.

Here are the major takeaways:

STRETCH IRA

Let's start with the bad news. The STRETCH IRA is dead, replaced with a 10-year rule. The STRETCH IRA allowed non-spousal IRA beneficiaries to "stretch" required minimum distributions (RMDs) from an inherited account over their own lifetime (which allowed the funds to potentially grow tax-free for decades).

The Ten Year Rule now means all inherited IRAs must be fully withdrawn by the 10th year following that inheritance. Within that 10-year period, there are no distribution requirements giving beneficiaries some flexibility. This could have been much worse as a 5-year rule was originally proposed.

Some beneficiaries are not subjected to the new rule, including:

  • Spouses
  • Disabled
  • Chronically ill
  • Individuals less than 10 years younger than the decedent
  • Certain minor children until they reach the age of majority, at which point the ten-year rule would commence

Required Minimum Distributions (RMDs) will go from age 70.5 to 72

The current RMD age is 70.5, and a lot of planning has been centered on that number. The new age at which point the government forces you to start taking distributions is 72. While the 1.5 years is not much, it does help many people who would have otherwise been forced to pay a lot of taxes. You actually do not have to take the first distribution until April 1 of the following year after you turn 72 (favoring those born in the first half of the year).

No Age Restrictions for Contributions past age 70.5 to Traditional IRAs

Traditional IRA contributions are no longer prohibited after age 70.5. This is beneficial as Americans live longer and work longer, they can now contribute longer into their lives.

401K's added for Part Time Employees

Part time employees are now eligible to participate in saving for retirement. Previously, employees who hadn't worked at least 1,000 hours were not eligible. Starting in 2021, the new retirement law guarantees 401K plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period. The new rule doesn't apply to collectively bargained employees, though.

Annuity Rule Changes

Currently, rules require disclosures on the total balance of your retirement accounts. The SECURE Act will now require 401K plan administrators to provide annual "lifetime income disclosure statements" to participants. These statements will show how much money you could get each month if your total 401K account balance were used to purchase an annuity.

The new retirement law also makes it easier for 401K plan sponsors to offer annuities and other "lifetime income" options to plan participants by taking away some of the associated legal risks. These annuities are now portable, too. So, for example, if you leave your job you can roll over the 401K annuity you had with your former employer to another 401K or IRA and avoid surrender charges and fees.

Penalty-Free Withdrawals for Birth or Adoption of Child

For those who are expecting a baby (either through traditional means or by adoption) can now use 401K, IRA, or other retirement accounts to pay for the cost of the birth of a child or the cost of the adoption of a child.

The new retirement law lets you take out up to $5,000 (married couples can each pull $5,000 from their own accounts) following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. The funds are still subject to income tax, unless they are repaid. You have one year from the birth (or adoption) date to make the withdraw without being subject to the 10% penalty. If you deposit the money back into the retirement, it will be treated as a rollover and not be part of your taxable income.

No Changes To Qualified Charitable Distributions (QCDs)

The SECURE Act actually makes no changes to the date at which individuals may begin to use their IRAs to make QCDs. So, at age 70.5, while you no longer have to take an RMD, you may still use the IRA to make a QCD of up to $100,000 for the year (after turning 70.5). And when starting RMDs, the dollar value given to charity in a QCD will reduce the required minimum distribution at age 72.

Other Key Changes

  • Maximum contribution percentages for 401K automatic enrollment increased - Firms can auto enroll employees into 401K's to increase participation. Starting at 3%, and increasing by 3% for every year worked- This was originally capped at 10%. The new law increases the cap to 15%.
  • Credit Card Access to 401K Loans Prohibited - The new law flatly prohibits 401K loans provided through a credit card, debit card or similar arrangement. This change, which takes effect immediately, is designed to prevent easy access to retirement funds to pay for routine or small purchases.
  • Credits for Small Businesses to offer Retirement Plans - Small businesses are currently provided 50% of the startup costs of the plan in tax credits. A new $500 tax credit is created for a small business's startup costs for new 401K plans and SIMPLE IRA plans that include automatic enrollment. Lastly, small businesses can now use MEP, or Multiple Employer Plan, to spread administrative costs over multiple small businesses.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.