There is a new bill being discussed in Congress called the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Whether in its current state or a newer version, this multi-faceted and bi-partisan plan is likely to pass in the near future.
What are the likely terms of the SECURE Act and how might it affect your financial future?
Increasing the legal age of contributions.
As of right now, once you reach age 70 and a half, you can no longer contribute to your traditional IRA. This is an archaic provision created when life expectancies were lower.
Under the SECURE Act, those who are fully capable of working into their 70s can do so while continuing to contribute to their retirement account, potentially on a tax-deductible basis.
Delaying requirement minimum distributions.
Once you reach 70 and a half years old, you are required to start withdrawing a certain amount from your retirement savings in order to avoid penalties. For those who are still working in their 70s, this creates a terrible tax situation by increasing their taxable income and potentially raising their marginal tax bracket. This actually encourages people to quit their jobs despite being happy and capable to keep working.
Under the SECURE Act, that age will go up to between 72 and 75 in response to the increasing life expectancy and aging workforce.
Extending benefits to part-time employees.
If you’ve ever worked for a company with a 401(k) plan, you’ve probably seen the fine print of “full-time employees only.”
A provision of the SECURE Act is designed to allow part-time workers with tenure to contribute to company-sponsored 401(k) plans, which will be incredibly beneficial to those who work less than 40 hours each week.
Tax credits for small businesses.
Many larger companies offer 401(k) plans for employees, but it’s not as common among small businesses. This can put smaller employers at a hiring disadvantage and employees of smaller employers at a retirement savings disadvantage in the future.
This new act will offer tax credits to small businesses for creating plans and encourages those employers to set up auto-enrollment for their team. It may also allow small companies to band together to offer benefits collectively.
The annuity option.
While all of the previous aspects of the SECURE Act will be beneficial, the fifth provision is borderline hazardous if not carried out effectively.
Part of the act is to allow companies to add annuity and lifetime income options to their retirement packages. Used properly, these solutions can be incredibly helpful to potential retirees. However, they can also be very expensive, inflexible, confusing and cumbersome to those who don’t fully understand them. The same way some people choose their investments haphazardly in their 401(k)s, some people also won’t understand the proper way of using these complicated options and may not use them properly to their own advantage.
It is my fear that bad choices will be made, packages that are not in an individual’s best interest will be sold by unscrupulous salespeople, and financial futures could be hurt irrevocably.
Saving the worst for last.
The final provision in the SECURE Act is a bad idea for everyone—except the government’s coffers. This provision would eliminate the “stretch IRA” rules for non-spousal beneficiaries.
The current policy allows beneficiaries of IRAs and 401Ks who are not spouses to take a minimum withdrawal from the account each year throughout their life expectancy. If you were to inherit an IRA today and your life expectancy was another 50 years, you’d only have to pull out and pay taxes on a small amount each year. This would preserve the account, preserve the tax efficiency, preserve the amount invested and help you create a lot of tax-deferred wealth.
The proposed changes would remove that policy and require you to pull out 100% of what you’ve inherited within 10 years.
Say I died today and left my daughter an IRA with $2 million in it. Under the stretch policy, she may only have to withdraw $30,000 each year—less than 2% of the balance. She would pay ordinary income taxes on that annual amount, just as if it was a paycheck.
If that policy goes away and is replaced with this new 10-year limit, she’d have to pull $200,000 out every year. Adding that to her income will push her into a much higher tax bracket and end up costing her a lot more in taxes. Basically, if this provision passes, the government will become a much larger beneficiary of my IRA.
The SECURE Act is likely to pass in some form in the near future. If it does, it could be highly beneficial to your financial future, but still has some reasons to be wary. If given the opportunity, do your homework or talk to a trusted advisor before purchasing an annuity or lifetime income plan and consider restructuring your inheritable savings.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.