Congress loves its acronyms. The SECURE Act—Setting Every Community Up for Retirement Act. Did they pay someone to come up with this? I’m getting a lot of pings on this law. Will the SECURE Act upend your retirement savings?There’re a lot of articles out there catastrophizing. They’re making a big deal out of certain provisions. This is not an overhaul of the American retirement system. It’s mostly a tweak. And most of the tweaks will benefit most Americans. Let’s briefly summarize those provisions that affect your retirement security and the wild card in the bill, the elimination of the inherited IRA stretch provisions.
One of the biggest things is they’ve changed the required minimum distribution date, the date at which you must start taking withdrawals from your IRA, from 70 ½ to 72. Now, this is not a long stretch. This is 18 months. But it will permit more flexibility for retirees, allow more time for those who are trying to do Roth conversions and protect their retirement money from high levels of taxation. It will give them flexibility. That unequivocally is a good thing.
There is one small caveat, and that is if you take advantage of qualified charitable distributions, those occur with RMDs. So very likely, qualified charitable distributions will now have to start at 72 instead of 70 ½. Anyone that’s making qualified charitable distributions does not have a retirement security problem. And so that’s probably not an issue for Congress.
There are no age restrictions in the new bill on making IRA contributions as long as you’re still working. This is good. There are a lot of people working in their 70s. To be able to continue to make IRA contributions past the RMD age is a good thing for those few people. It’s really just extending a privilege that already exists for 401(k)s. And let’s face it, the majority of people working at that phase of life have access to a 401(k). But for those who don’t, this is a nice small thing.
401(k)s are being made available for part-time workers. In terms of retirement security for the future, it’s an unalloyed good thing. Lifetime income distribution disclosures are now going to be required of 401(k)s. If you’re working, in addition to your balance, you will see on the statement or online a number that implies the annuity value of your pot of gold. Put that in English—how much will it be worth to you in terms of a monthly income when you’re retired? It doesn’t actually change anything; it’s just a disclosure rule. It’s a great rule, because most people don’t realize how far they are from how much they need.
One of the biggest issues, in my mind, is the annuity option. In some countries, it’s required that you annuitize your 401(k) when you retire. In the United States, there’s not even an annuity provision. I’m not saying that you should be required to annuitize, but they have created provisions that permit the annuitization of a 401(k). What does that mean in English? You can buy an income stream. Not only are they allowing you to find out what the income stream should be worth—you can actually go out and buy it. And that’s called a single-premium annuity.
Another of my concerns is that as the sop to the insurance industry, and basically a tribute to the power of their lobbyists, they’ve somehow managed to get invariable and other cash balance annuities into the fold. Those are typically bad ideas. They’re high fees, high expense, and you don’t need the deferral they offer, because the money’s already in a 401(k). So that provision, for the portability of cash value in annuities, I think is an alloyed bad deal, with the exception that if it helps someone save that otherwise wouldn’t, maybe that’s okay. Very controversial. It’s very interesting how they were able to nip and tuck that provision into this law.
Automatic contributions to 401(k)s. If young people are automatically enrolled, they tend to save more. They’ve lifted the cap on automatic contributions, and they’ve actually thrown in some tax credits to encourage small businesses to take on these provisions. That’s a nice way to get the right thing done. They’ve also provided additional tax credits and additional help to small businesses to bring in 401(k)s.
So let’s talk briefly about the most controversial provision: the elimination of the non-spouse inherited IRA provision for acquired minimum distributions. Boy, that sounds like a legal mouthful. What it essentially says, as we discussed earlier, is when you inherit an IRA, you are required to distribute that IRA. The law, as it stands right now, says you can give that IRA to your child. That child could be 5 years old, and you can divide that pot of gold by the life expectancy of the child and take out less money than the account is growing by. What you have, in essence, is an in-perpetuity IRA if the beneficiaries have done it right.
And there’s a common lore consensus that accounts and trusts and devices that occur in perpetuity do not favor public policy or are not necessarily a great idea. And it certainly wasn’t what the IRA was designed for.
Obviously those people, as a very small percentage of IRA owners who would benefit from those provisions, are not thrilled to see the stretch IRA go away. This is not the IRS taking the IRA. This is just a provision that says if the person who inherits it is more than 10 years younger than you but is not your wife, then you will have to draw down that IRA in a shorter period of time. Because, of course, we need to remember that when you put money in an IRA, you didn’t pay the tax. The IRS at some point expects to get its money back. And that is the mechanism that they’ve decided to put in it.
There’s a small percentage of people who are unhappy with that. It does not affect your retirement security one bit. It only affects intergenerational planning.
And we don’t live in a vacuum. There are strategies that we can evoke. There are new planning tactics that we’ll be able to adopt to mitigate the impact of that provision.
It’s not yet law. The vast majority of this law is, in fact, well-designed. Not all legislation is as carefully thought through. There’s a lot of research behind a lot of the provisions. For a small minority, from an intergenerational transfer perspective, it’s a net negative. You can’t sugarcoat that. But it is a negative that can be mitigated with smart planning.
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