The Many Impacts of the SECURE Act for Individuals
On December 20, 2019, the president signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which includes significant changes for the retirement plan industry. While some changes only affect qualified plan administration, many other changes may affect not only your retirement planning, but also the legacy you want to leave for your family.
Changes affecting your retirement plan
Traditional IRA and Required Minimum Distribution (RMD) changes
In 2015, AARP quoted a labor statistic showing that labor force participation is expected to reach 32% among workers aged 65–74 by 2022. Another AARP article in 2019 stated that more than 20% of people over age 65 are either working or looking for work. Among the influx of older workers, many people age 70 and older had been trying to save for retirement with limited success.
How might the SECURE Act change this? Prior to the new legislation, when an individual reached age 70 ½, many tax-qualified investment vehicles required retirement plan participants to begin taking distributions and their savings options became more limited. Previously, traditional IRAs were no longer an option the year an individual reached 70 ½, regardless of earned income. The SECURE Act pushes the RMD date out to age 72 and allows older workers to continue investing in traditional IRAs — an increased incentive for older workers to either start saving or to continue saving into their 70s and beyond.
Have you heard of the “stretch IRA?” On the opposite end of the spectrum from the worker seeking to save more for retirement is the worker who has saved significant assets and wants to leave a legacy for his or her heirs. One popular strategy was to designate heirs, or qualified trusts listing heirs, as beneficiaries of IRAs and other tax-advantaged savings accounts. Beneficiaries could then use their own life expectancy (or the oldest heir’s life expectancy in a qualified trust) to schedule payouts from that “inherited” account. The benefit was that younger folks could “stretch” payments out over a 40- or 50-year life expectancy, furthering the tax-deferred growth potential in tax-advantaged accounts while maintaining flexibility and the ability to manage tax brackets.
Not anymore. Now — except for spouses, beneficiaries close in age, minors up to age 18, or special needs beneficiaries — most beneficiaries will need to fully deplete the inherited account by the end of the 10th year following the death of the account owner. Younger beneficiaries can no longer stretch payments out over a significant time. For that reason, IRAs are now a much less attractive wealth transfer strategy.
While not as far-reaching as the other changes to retirement planning, graduate and postdoctoral students receiving various types of stipends — as well as those receiving “difficulty of care” payments — can now consider funds received as earned income for retirement plan contributions.
The SECURE Act added additional provisions for adoption assistance and disaster relief changes, and added educational loan repayments (up to $10,000) as a qualified expense from a 529 plan.
How CLA Wealth Advisors can help
The provisions in the SECURE Act will likely affect your financial picture. While some of the SECURE Act’s provisions are positive and will provide greater flexibility, particularly for older workers, many of the provisions will pose new challenges for individuals as they work toward securing both their own retirement and the legacy for their heirs. It’s important that you consider the context of these changes within the purview of your comprehensive financial and estate plan. At CLA, our wealth advisory professionals can help you evaluate how these changes may affect your ability to achieve your goals, your way.