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Godot has finally arrived. With the flash of President Trump’s pen, the fabled bipartisan SECURE Act has become law. What took it so long to earn that presidential signature is a tale best left to the political pages.
What you should be more concerned with is how the SECURE Act now changes your personal IRA.
It certainly does, in good, bad and even controversial ways. Some may impact you, some may be too late for you, and some you may be glad don’t apply to you.
Which of these seven changes matter to you?
#1: You won’t be forced to take distributions at age 70½
The legislation establishing the Individual Retirement Account (IRA) goes back to the mid-1970s. Beginning then, and until the passage of the SECURE Act, the IRA always contained a provision requiring owners to begin mandatory distributions at age 70½.
Well, actually that’s the April after your turn 70½. It gets complicated.
In the face of this mandatory requirement, people have been living (and in some cases working) longer. The age 70½ Required Minimum Distribution (RMD) rule exasperates our growing longevity problem. The SECURE Act changes the RMD Rule.
“The biggest benefit of the SECURE ACT may be that people actually understand when RMDs must begin from retirement accounts: when they turn age 72!” says Patti B. Black, a financial planner at Bridgeworth, LLC in Birmingham, Alabama. “That’s much easier to understand than ‘April 1 of the calendar year after you turn 70½.’”
Of course, being the government, it won’t be that simple right away. This is one thing you’ll need to check with your tax advisor to see what it means for you.
#2: You won’t be prevented from contributing to your IRA no matter what your age
There was a corollary to this age 70½ RMD Rule. Once you hit that age, you could no longer contribute to your IRA even if you continued working. This, by the way, was one of the advantages of saving through 401(k) plans. They do not have a similar restriction.
Recall, with people living longer they are also working longer. If you’re working into your 70s, you have been prevented from contributing to your IRA. The SECURE Act changes that.
“The SECURE Act has finally passed after three years in the legislative pipeline because of the benefits it provides for retirees,” says Zane Dalal, Executive Vice President at Benefit Programs Administration in Los Angeles. “For IRAs, the cap for contributions has been extended beyond 70½. This adds a commonsense approach and a simplified way of doing things, a problem that we hear many clients addressing. The process of saving for retirement, and how to access those funds upon retirement, has become overcomplicated.”
#3: You won’t be able to delay taxes by naming the next generation as beneficiaries to your IRA
You may view the first two items as a positive. You may, however, be less than excited about this next item, especially if you’ve invested in an intricate estate planning vehicle known as a “stretch” IRA. The SECURE Act changes that.
“For beneficiaries of IRAs, the biggest impact of the SECURE Act is the shortening of the ‘stretch’ provision,” says Andy Panko, owner of Tenon Financial LLC in Iselin, New Jersey. “Prior to the SECURE Act, when an IRA owner died and a beneficiary other than the original owner’s spouse received the account, the beneficiary had the ability to ‘stretch’ withdrawals from the IRA over their lifetime. For young beneficiaries, that could have meant slowly withdrawing the money over multiple decades. Under the SECURE Act, the stretch will be limited to 10 years. This means non-spouse beneficiaries will be forced to withdraw money—and pay tax on it—much sooner than under current stretch rules.”
#4: The definition of “income” is broadened so more people will be able to contribute to an IRA
Back in the “good news” category comes this little gem that will make grad students and other workers happy.
In the past, compensatory grants and other awards given to those studying for an advanced degree were not considered “income” for the purposes of making your annual IRA contribution. The SECURE Act changes that.
“For lower-income workers, the inclusion of fellowship & stipends for students and the inclusion of ‘difficulty of care’ payments home healthcare workers will be important,” says Kevin Gaines, Retirement Income Planner, American Financial Management Group, Berwyn, Pennsylvania. Now, they, too, can contribution to an IRA.
#5: It will be harder for you to take money out for non-retirement reasons
You can classify this modification as “bad news that is really good news.” Prior to the new law, you might have easily taken money from your IRA for non-retirement expenses. The SECURE Act changes that.
“IRA holders will not be able to use non-traditional IRA loans (credit cards linked to the account and other arrangements),” says Shann M. Chaudhry, Managing Member of Shann M. Chaudhry, Esq., Attorney at Law, PLLC in San Antonio.
Although some feel it’s less of a problem that it seems, others have labeled “leakage” as an issue. Taking money out prematurely from your retirement savings forfeits years of compound growth. This results in a smaller nest egg when it comes time to retire.
#6: It will be easier for you to take money out for non-retirement reasons
Because this can jeopardize growth in retirement assets, you might want to call this category “good news that is really bad news.” Still, there are some things that are more valuable than a comfortable retirement. In the past, you didn’t have the freedom to choose which you prefer. The SECURE Act changes that.
They say “family is the most important thing” and the new law seems to agree. Under the SECURE Act, “IRA holders can use money in their account for child birth and adoption cost without penalty,” says Chaudhry.
#7: You might never get to the point of owning your own personal IRA
This last point has generated a little bit of controversy. While it addresses matters confined to 401(k) plans, it may obviate the need to roll over your savings into an IRA plan once you retire.
On the face of it, it appears to address the problem of not having a reliable income stream during retirement. The SECURE Act changes that.
“With respect to lifetime income, SECURE makes a number of changes, including mandating disclosure, creating portability, and most importantly, creating a broad safe harbor for annuity selection for plan sponsors,” says Drew Carrington, Senior Vice President and Head of Institutional Defined Contribution for Franklin Templeton in San Mateo, California. “The fiduciary concerns regarding annuity selection have been a roadblock to almost all consideration of retirement income solutions in plans, and the removal of that hurdle will spark activity on this front.”
Not everyone sees this as a clear-cut positive. “Currently, many 401(k) plans don’t provide easy access to annuities,” says Panko. “Annuities can be valuable because they provide lifetime guaranteed income. Basically, they take a nest egg and turn it into a pension. However, now that insurance companies will have more access to sell their products through 401(k) plans, 401(k) plan participants may be more exposed to insurance company sales pitches and products which are not truly in participants’ best interest. Currently, fiduciary protections built in to 401(k) plans have prevented most plans from allowing annuities. Now, those protections will presumably need to be relaxed to accommodate broader access to annuities.”
What are your thoughts on these seven SECURE Act changes? Do any of them impact you and your IRA? If you don’t know the answer or aren’t sure of the answer, you’ll need to speak to your tax advisor to find out.