Assessing How The SECURE Act May Impact Investing For Your Retirement

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.
• I do much more than just articles at Yield Hunting: Alt Inc Opps: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

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The Ten Year Rule now means all inherited IRAs must be fully withdrawn by the 10th year following that inheritance.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.

Analyst’s 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.

Comments

[Pdhorn]

No.longer any age restrictions on further IRA contributions, you report, but are they still tax deductible and does this apply to SEP IRAs too? Thanks.

[This]

Does anyone know if the 403(b) Pre-1987 accumulation has the RMD at age 76.5 now instead of age 75 where it was?

[Vexed]

I am confused regarding the statement contained in the RMD section of the article: "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)." Does that mean the retiree will be required to take two RMDs at age 73; one for the year the retiree turned 72 and then for the year the retiree turned 73?

[Retired Investor]

@Vexed Yes. If you decide to delay the first one, you need to take two the following year.

[gstucke]

If RMD's don't start until the year after you turn 72 what is the factor used to compute that 1st year distribution? Is it the same factor that it used to be for 72? i.e. 25.6?

[Vexed]

gstucke: I found the answer to your question here: www.fool.com/...

[robertlgriffin]

Vexed: I quickly reviewed the "Fool" article and it doesn't seem that they mentioned the proposed new IRS tables under proposed regulations to be effective beginning in 2021. These new tables are unrelated to the SECURE Act since the tables are supposed to be updated every 10 years to reflect actuarial changes. I think public comments on the proposed reg are due in about a week and I doubt the new tables will be changed. They'll add about a year and a half to a 72 year old as I recall.

[Phenom1]

Please All: Note that this new law is fattening the pigs for the slaughter. Unless the Trump tax cuts are made permanent (they sunset in 2025), the extra 1.5 years for compounding will mean little. If we revert to the old tax brackets without the personal exemption that was eliminated, we'll pay out much more in taxes under the old brackets than we will ever be able to save as a result of the extra compounding.

Pressure Congress to make the Trump tax cuts permanent.

[AlieGee]

One day the age could be changed to a younger one....The sooner RMDs are taken, the
govt will get money sooner...II'm sure they won't have a problem taking it.

[The Aiki Trader]

You know you can start taking withdraws at 59 1/2 without penalty from IRAs.

[TP781]

In your opinion, how has the new inherited IRA rule changed the way we think about distributions? Let’s assume an individual has a large IRA that will most likely be passed to the next generation. Better to start taking additional distributions now and pay the tax today, and then reinvest the proceeds in nonqual acct for legacy purposes? Or, possibly fund some sort of Life Insurance policy with additional proceeds? Roth IRA conversion? I’m trying to get my arms around how this new law may, or may not, change the way we look at IRA distributions and Legacy assets.... How do you quantify the effects of taxes? Really appreciate your perspective! Thanks!

[The Aiki Trader]

It means you should consider while you are working contributing to a Roth IRA so as not to put your heirs who are probably of working age and maybe even of prime working age into 32% or higher tax brackets.

[sts66]

A life insurance policy isn't a bad idea - I'm pretty sure proceeds from that are non-taxable even if a non-spouse is the beneficiary.

[Alpha Gen Capital]

Death benefit is tax free. Cash value can be accessed (highly liquid) up to 90% of value.

[paulalbert]

The optionality of when to meet the 10 year payout requirement actually may create some interesting possibilities of what is optimum. Letting it compound for 10 years and then paying in a lump sum, may be a better net present value result even after paying an enormous tax payment. This is relevant for us since I am 77 and my wife is 79 and our son is 43. Assuming the normal expected course of events, I die first and my wife lives into her nineties ( family history suggests that is a good possibility ) our son is likely faced with this decision in his mid fifties. Because my wife is a couple years older, we will not benefit that much from the spousal stretch out even if i die first. Trying to model different scenarios is challenging , not only because we do not know when we are going to die or the order, but the inputs require investment return assumptions, and also for our son he needs to assume his marginal tax rate during the 10 year period, affected by his earned and investment income during the period as well as the vicissitudes of politicians.

In spite of our RMDs increasing each year, we have managed to keep the aggregate value of our IRA Rollover accounts going up, so as the RMD divisor goes down our RMD is larger and larger and keeps us in a high tax bracket. I guess many would rightfully say we have a good problem, but it illustrates something I have commented on in the past;, i.e., that for anyone who has prudently saved for retirement ( IRA, 401K, etc. ) assuming a lower tax bracket in retirement is not likely to be reality. Having 85% of gross ( no deduction for enormous Medicare premiums ) SocIal Security taxed at ordinary rates is particularly galling.

[7865671]

@paulalbert
"...we will not benefit that much from the spousal stretch out..."
As I understood the article, spouses are not required to deplete the inherited IRA within the 10 years. There are still RMD's, but the 10 year window does not apply. Maybe I've misunderstood???

[TP781]

Fantastic point!!! Everyone is chomping at the bit to help during the accumulation phase, but very few are skilled in helping with the distribution phase... I believe in the 3 bucket system: Liquidity, Lifetime, and Legacy... Uniquely, the legacy bucket has the most upside and tax advantages. Unfortunately I feel most advisors are so focused on capturing assets (meaning their all about the investments and not the over all plan) that they lack the skills to help with the distribution of the assets. Do you think I’m over thinking things?

[rickevantodd]

If you or your spouse do not need the other IRA upon death than maybe consider, based upon taxes etc, letting your son inherit as Each parent passes in lieu of waiting until both parents are gone.

[Retired Investor]

The stretch IRA died because the government needed to make up the taxes lost by delaying RMDs to 72. This won’t be the last change we see to generate more tax revenue considering the deficits the US has. I fully expect Roths to have RMDs down the road so the funds get moved to taxable investments.

[robertlgriffin]

Retired Investor: I expect much more change to Roths than merely requiring an RMD. If the Congress gets desperate enough, they will do whatever is necessary, including something like taxing all growth in a Roth beyond a given date (to grandfather in existing appreciation/growth, but tax all future income upon withdrawal). The Roth IRA, like the former stretch IRA provisions, is too good to be true.

[IZZKUBE2.5]

@robertlgriffin ,

" including something like taxing all growth in a Roth beyond a given date (to grandfather in existing appreciation/growth, but tax all future income upon withdrawal):"

Yup, I agree with you, it's too good to be true even though one has already paid the tax upfront (after tax contributions), but they'll find a way to tax something and your idea...would be the easiest. Please don't offer any more idea(s) because they read it here.

[Retired Investor]

@IZZKUBE2.5 @robertlgriffin Should we ask SA to delete these comments so Congress doesn’t see them?

[Signup22]

Is increased access to annuities really a good thing?

[Alpha Gen Capital]

I believe so. Most investors/retirees today have WAY too much risk exposure. Some know that. Most have no idea. They need a pension like income stream not correlated to the markets. Annuities are just private pensions.

[sts66]

"They need a pension like income stream not correlated to the markets"

You mean something like a good solid CEF? (or many of them ;-) I dislike annuities in this low interest rate environment because you have to live so damn long just to get your own money back, let alone actually get paid more than you gave the insurance company, and it's even worse if they're inflation adjusted. Actually maybe the opposite - the purchasing power of a fixed monthly payment is going to shrink drastically over 20 yrs.

[polecat]

“I told my children long ago, “If your generation ever figures out what my generation has done to you, you would round up all the Boomers up and shoot us. Lucky for us, your generation has proven to be lazy and stupid “.
Now, plans like this will put the finishing touch’s on the Boomers screwing all of the following generations.”
I posted this several months ago, an once again Boomers are screwing those that come after.

[Dennis O]

@polecat It made me think. What you said may be correct because of our age group BUT the real screwing as you put it is really from only a few people . Those people would be our elected officials who caused the large deficits which I assume you are talking about. It's like a lot of things in life. Example- union leaders are corrupt but the members are everyday folks doing the best they can. Same could be said about FBI leadership were recently found corrupt but the FBI guy on the job is also doing his job. You get my point. The next generation may have a reason to feel wronged but by only a few who have the power to do so. Have a great day.

[fhbecker]

polecat,

I think its the politicians and those that keep voting for the two big parties that are doing the "screwing." and not everyone born between 1946 and 1964.

Sadly, many of the boomers "children" appear to be looking toward a form of government that is not very "capitalist."

[Swolfe]

Seems current and former “capitalist” governments here have done a great job in burdening future generations with debt and unfunded deferred maintenance. Captalism per se is not the answer. Responsible planning with consideration of future consequences is. With this move maybe they’re adding insult to injury by saying we want some of that deferred tax back sooner. But does that really hurt future generations? They still have all the better savings opportunities included to provide for themselves - a main tenet of “capitalism” US style today.

[Donggle]

This will make one more secure? No WAY. Your still the working poor!

[Phenom1]

Typical government wording...the opposite of what will happen. Remember the "affordable care act" was neither.

[Mercouger]

Thank you

[amegalo]

The new stretch IRA rule does not affect current stretch IRAs, only new ones correct?

[robertlgriffin]

amegalo: The new rules as to the 10 year NON-STRETCH apply to decedents dying after 12/31/2019, so there is a grandfather provision for current inherited IRAs.

[Alpha Gen Capital]

Correct