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This is a follow-up to my October 1, 2019 post about the SECURE Act of 2019 and its implications for estate planning.
The most significant legislation affecting retirement became law — as of Friday, Dec. 20.
Congress passed an important retirement-savings law called Setting Every Community Up for Retirement Enhancement, or the SECURE Act of 2019. The law takes effect on Jan. 1, 2020. After stalling for months, Congress suddenly passed the bills as an attachment to budget appropriations. Here are some key provisions:
Eliminated the “stretch” IRA for most non-spouse beneficiaries. Certain beneficiaries are now required to withdraw inherited account balances within 10 years of the account owner’s death
More time in IRAs and 401(k)s. The bill raises the age for required minimum distributions (RMDs) from 70 1/2 to 72 years old.
Grant older workers benefits. As long as you’re working, you can still contribute to your IRA after age 70 1/2. Previously, you couldn’t.
Boost small-business 401(k)s. Small businesses can now band together in group plans.
Annuity adoptions. Would allow employer-sponsored 401(k) plans to add annuities as investment options.
529 plans. They can be used to repay up to $10,000 in student loans, as well as for siblings.
Here are more details:
Limits on stretch IRAs
Most non-spouse designated beneficiaries will no longer be able to “stretch” the RMDs of inherited retirement accounts over their life expectancy. The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: Spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not yet reached the “age of majority,” disabled individuals, and chronically ill individuals may still benefit from the pre-Act withdrawal rules to stretch the RMDs over their life expectancy.
New age limits
Giving investors with tax-deferred accounts another year and a half before Uncle Sam requires withdrawals allows us to save longer for retirement, even after withdrawals start.
However, here’s the government money grab: To make up for lost tax revenue, the new law scraps what’s known as a “stretch IRA.”
Americans who inherit an IRA must now withdraw the money within 10 years of the account owner’s death, along with paying taxes. Surviving spouses and minor children are still exempt.
Under the new law, those types of exempt heirs can still spend down inherited IRA accounts over their lifetime, an estate-planning strategy known as the “stretch IRA.”
So what’s a better planning tool? Some suggest that life insurance will now be a more tax-efficient asset to pass to beneficiaries since the long-term stretch IRA is eliminated for most non-spouse beneficiaries.
401(k) options for small businesses
The SECURE Act expands access to multiemployer plans, or MEPs, to pool resources and share the costs of a retirement plan for employees.
Small businesses now can join group plans alongside other companies. This cuts administration and management costs and ideally makes higher-quality plans available to more small businesses and their workers.
The law also enhances automatic enrollment and auto-escalation, allowing companies to enroll employees automatically into a retirement plan at a 6% rate of salary contribution, up from 3%.
Employers can now raise employee contributions to a maximum of 15% of annual pay. Workers can opt out of these features at any time.
Annuity options, good and bad
Courtesy of the insurance lobby, the SECURE Act now allows 401(k) plans to add annuities as a retirement plan option.
The idea? Annuities may solve the problem of lifetime income for workers. Annuities are insurance policies that convert retirement savings into income. Common in pension plans, annuities to date have not been popular in 401(k)s.
Annuities have downsides: Fees are often high. There’s always a risk that the “guaranteed lifetime income” could turn out to be a mirage if the insurance company goes belly-up. Fears they could be left on the hook have prompted many 401(k) providers to steer clear of annuities.
Under the SECURE Act, retirement plans now have “safe harbor” from being sued if annuity providers go out of business or stop making payments. Now that it’s less likely they will be sued, employers may open up to annuities.
Consumer advocates warn that 401(k) investors and plans will be open to more risk. The SECURE act means mom-and-pop investors would be making bets on the ability of insurers to meet long-term obligations, and could get stuck with high-cost annuities that are not a fit.
That said, annuities have fans. Annuities allow holders to delay income, installment or lump-sum payments until the investor elects to receive them. Independent financial advisers — not your employer — should be the one helping select the right income annuity based on your situation.
529 plans and saving for kids
The legislation expands 529 education savings accounts to cover registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including for siblings); and private elementary, secondary, or religious schools.
The student-loan provision lets Americans repay student loans for a 529 beneficiary, with a $10,000 limit. An additional $10,000 can be used to pay off student debt for each of the 529 plan beneficiary’s siblings.
A final positive: The SECURE Act would allow investors early access to IRA funds for any “qualified birth or adoption” by creating a new exception to the 10% penalty.
However, the money is still subject to tax. The $5,000 amount is the lifetime limit, and applies to any distribution from the retirement account within one year from the date of birth or legal adoption. The exception applies to children under age 18, or physically or mentally disabled and incapable of self-support.
Contact our office to schedule your complimentary estate planning consultation and review at 415-235-9162.