The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 handily passed the House of Representatives in May and has been languishing in the Senate since. Speculation abounds that it will attach to the budget deal Congress and the President are poised to work out. The SECURE Act is a grab bag of new rules for employer retirement plans and IRAs, with a few extraneous provisions thrown in. Here is an overview of those provisions with the most widespread effect.
The Good: Contribute Longer and From More Income Sources. Today, a person must stop IRA contributions at age 70-1/2, regardless of retirement. This act allows continuing contributions so long as a person has earned income, similar to 401k contribution rules. The key concept is “earned income,” which for most people means salary and wages. The Act expands the definition to include certain fellowships and stipends received by young academics and some payments by home healthcare workers.
The Good: Make it Easier to Establish and Expand Employer Plans. The Act has a variety of incentives for employers to establish and expand employee retirement plans and to offer them to more workers, including part time employees. If your employer does net yet offer a retirement plan, expanded tax credits and simplified compliance may help change that.
The Good: Delay Your Required Minimum Distributions. Currently, IRA holders must begin taking Required Minimum Distributions the year they turn 70-1/2. The SECURE Act would delay that starting age to 72. Those IRA holders who wish to can always take distributions earlier; they simply won’t be required to do so.
The Bad: Putting Annuities Inside Employer Retirement Plans. An annuity may have a place in planning for retirement. Some retirees value the guarantee of a fixed income stream over other investment considerations. If a retiree chooses to annuitize a retirement plan, that decision should be made at retirement. Whatever advantages an annuity may have—typically tax deferral and a guaranteed return of initial capital at death—are irrelevant in an employer retirement plan. Don’t choose an annuity within a plan.
The Ugly: Inherited IRAs Must Pay Out Within Ten Years. This provision is a pure fund raiser, although it has some logic behind it. IRAs and retirement plans are meant to fund the retirement of the person who established it, along with his or her spouse. Those funds were never intended to support children and grandchildren throughout their lives. Thus, with some exceptions, IRAs and employer plans left to anyone other than a spouse must be fully distributed within ten years. Accelerating these distributions accelerates the associated tax revenue. The trick here is that to avoid the ten-year distribution rule, the plan cannot be left in trust to a surviving spouse—it must be left outright. Consider the headaches this will cause in a second marriage: The spouses typically want to leave their IRAs to each other and also ensure that at the second death, each spouse’s remaining IRA goes to his or her own children. The uneasy compromises estate planners used to employ will no longer work.
The sped up payout for Inherited IRAs would affect those passing away beginning in 2020, so existing inherited IRAs will not be affected.
The bottom line? The SECURE Act has more pluses than minuses, but beware of those minuses.
Note: Claire E. Toth, JD, MLT, CFP™, is Vice President at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. Visit us at ptview.com.
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