INTRO: A major piece of retirement-related legislation known as the SECURE Act was passed by Congress and signed into law by President Trump in December 2019. The new law has significant implications for retirement plans – and by extension, the financial services industry and its clients.
What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement Act – or SECURE – is designed to help Americans save for retirement by increasing access to tax-advantaged accounts. It includes notable changes to regulations that will affect traditional IRAs, 529 plans, 401(k) plans and inherited IRAs. The SECURE Act came into effect on January 1st, 2020.
How does the SECURE Act affect individual retirement accounts (IRAs)?
The SECURE Act removes the age restriction for traditional IRA contributions, which were previously capped at age 70½. Now, anyone can contribute to an IRA regardless of age. Even if you stopped once you hit 70½, you can start up again! The law also raises the starting age for required minimum distributions – or RMDs. RMDs are the amount of money that US tax law requires individuals to withdraw from traditional IRAs and employee-sponsored retirement plans on an annual basis based on life expectancy. The new law requires RMDs to begin at age 72 years, up from 70½.
How does the SECURE Act affect 529 plans?
529 plans are tax-advantaged investment vehicles designed for higher education savings and expenses. The SECURE Act expands the existing definition of a tax-free distribution from 529s to include qualified student loan repayments of up to $10,000.
How does the SECURE Act affect 401(k) plans?
The SECURE Act includes a number of provisions designed to help small businesses set up 401(k)s for their employees. Some of the incentives come in the way of tax credits for setting up 401(k)s and using auto-enrollment features. It enables part-time employees to enroll in 401(k)s and increases the availability of annuity options in workplace retirement plans. It also allows individuals to withdraw up to $5,000 from 401(k) accounts for use toward the birth or adoption of a child.
How does the SECURE Act affect inherited IRAs?
While all of the benefits just described are designed to make retirement more accessible to all Americans, they all have some sort of tax incentive. Tax incentives to you means less revenue to the government. Therefore, Congress needed to find a way to pay for these tax benefits. In this bill, the SECURE Act uses inherited or “stretch" IRA’s. The SECURE Act decreases the number of beneficiaries eligible to extend inherited IRA distributions over their lifetime, essentially eliminating the stretch IRA. The new law requires those who inherit IRAs to withdraw all assets within 10 years, with some exceptions related to health and the age of the recipient. Now don’t worry, this only applies to inherited IRAs after January 1, 2020. If you already have a stretch IRA, you’re OK; it is grandfathered.
OUTRO: The responsibility of funding retirement continues to shift to individuals and plan sponsors. There are still Americans who face a significant retirement savings shortfall. The SECURE Act represents a bipartisan effort to provide more options and flexibility to savers. Implementation of these new regulations will likely incur some challenges, but the financial industry is working with regulators on the best path forward. Investors should consult with a financial professional to best understand how the SECURE Act might affect their financial plan and their approach to retirement savings.
This material is provided for informational purposes only and should not be construed as investment advice.
The views and opinions expressed may change based on market and other conditions. Unless otherwise noted, the opinions of the speakers provided are not necessarily those of Natixis Investment Managers or any of its affiliates.
Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.