Potential retirement saving impacts of the SECURE Act
Last month the House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), a bill that would be the biggest change to the American retirement system since 2006. There is a myriad of potential impacts to both individuals and businesses with how best to navigate these new changes to get the most out of your retirement savings. We will be looking at potential impacts for the individual taxpayers today.
Most of these changes on the individual side are aimed towards allowing flexibility. Everyone’s situation is different and the changes in the SECURE Act take some of the rigid restrictions on what your 401(k) plans can invest in and when you can use your money. For example, annuities are currently allowed in 401(k) plans but they are uncommon. The reason for this is concerns about liability in picking an annuity provider. The SECURE Act would update the safe harbor provision for plan sponsors allowing for more annuities to be offered inside 401(k) plans. This would be appealing to some individuals to have a stream of guaranteed payments once they retire. However, some experts say that if individuals would like annuities to set them up outside the 401(k). Annuities may be complex, come at a high cost, and sometimes not customer friendly so please be sure to consult your financial and/or tax advisor.
Some of the simpler changes would be to increase in the required minimum distribution (RMD) age from 70.5 to 72 and a removal of the age limitation on IRA contributions. The change in the required minimum distribution age would allow for more tax-free growth to happen inside your retirement account and the removal of the age limitation would allow people to save that are working later in life.
However, there could be some potential downsides to the SECURE Act. For example, required minimum distributions from your IRA when left to a family member who is not your spouse will be impacted. The SECURE Act will eliminate the ability to ‘stretch out’ the inherited IRA withdrawals over your lifetime, and require non-spouse beneficiaries to withdraw the IRA over no more than 10 years. This could potentially cause tax implications by driving their taxable income into higher tax brackets. So, tax planning will be imperative. Such tax planning consideration may include:
- making 401(k) Roth contributions rather than traditional 401(K) contributions,
- Roth IRA conversions,
- Gifting RMDs to charities,
- Establishing Charitable Remainder Trusts
These are just some of the many changes that could be on the horizon. As always, speak to your trusted tax and/or financial advisor if you wish to make any changes to your retirement saving strategies if the SECURE Act becomes law.