What the SECURE Act Could Mean for Your Retirement

Written by Brian Devers

“Secure” is one of those words that is thought of as very favorable by the general public. Recently, the House of Representatives passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). This act is currently in the hands of the Senate for revisions and approval. We won’t get into the shenanigans of politicians, but the name of the act itself garners positive feelings. “Secure” is generally perceived as a good word. Here are a few definitions from Merriam-Webster: “free from fear, peace of mind, assured, no doubt, free from danger, free from the risk of loss, trustworthy.”

So what definition of “secure” are you expecting from the SECURE Act? Is it “free from fear”? People are still questioning Social Security and have fear about its future availability. Is it “peace of mind”? Everyone has a different level of comfort that gives them peace of mind. Some of our clients have a comfort level of knowing they have $5,000 in their checking account, whereas others aren’t comfortable unless they see $25,000 in their account. I have peace of my mind knowing that my feet are firmly planted on the ground and not 20 feet in the air on a ladder, while others have peace of mind knowing that they can put on one of those flying squirrel-like jumpsuits, jump off a cliff, and fall with style. We hope that you have peace of mind knowing HSC is here to guide you.

So what proposed changes will come with the SECURE Act?

The SECURE Act proposes several changes to 401(k)s.

The first 401(k) change would be a $500 tax credit for small employers that set up automatic 401(k) enrollment for their employees. This is good because many people don’t have the discipline to set up and contribute to their IRAs, but having it withheld from paychecks is a step in the right direction towards retirement planning.

The second big change would allow for pooled 401(k) plans. The proposed benefit here is that more small employers would provide 401(k)s to their employees because they would be more affordable. I’m not overly thrilled with this new 401(k) arrangement. Call me cynical, but it seems to me if the employers aren’t directly paying the administration fees of the 401(k), they most likely will pass these administrative costs on to the employees through hidden fees.

The biggest 401(k) change would be the allowance of annuities inside 401(k)s. Two potential benefits of annuities are tax deferral and guaranteed income. The biggest weaknesses of annuities are high fees and capped upside. The first problem I have with this proposed change is that 401(k)s are already tax-deferred; thus, an annuity in a tax-deferred retirement plan is redundant and unnecessary. Secondly, the guaranteed income comes with high fees. Imagine you are a young worker with 30 to 40 years to save up for retirement. Those compounded fees and income caps will severely diminish the potential growth of your retirement account.

One nice feature they are trying to implement in the new 401(k) rules is a retirement calculator that would estimate your lifetime income at retirement.  Many of the large 401(k) providers offer online tools to show what kind of income stream your 401(k) would generate at retirement. If they can work out the rules for calculation, all 401(k) plans would be required to provide that information to participants at least annually.

The SECURE Act also proposes changes to IRAs.

The first IRA change would allow people to delay their required minimum distributions from Traditional IRAs to age 72. This is not a huge difference from the current age of 70.5, but it would be helpful for those who are still working at that age or who don’t need the distributions.

Secondly, people would be allowed to contribute to their Traditional IRAs as long as they have earned income. This would be a nice change for those who are still working past age 70.

The biggest change affecting IRAs is the distribution rules on inherited IRAs. Currently, the rule is very favorable and we have been able to stretch the required distributions over the life span of the beneficiary, based on their age when they inherited the IRA. The new rule for most non-spouse beneficiaries will be to distribute the inherited IRA over a 10 year period, with a few exceptions for minor children and people with disabilities. This change would create a large amount of tax revenue for the government. Spouses would still be able to keep taking the stretch distributions over a longer span of time, but for everyone else, their financial plans would need to be reassessed. Clients who inherit IRAs would need to do more strategic tax planning. Clients who care about their beneficiaries and don’t like giving the government a lot of tax money would need to decide if their drawdown strategy needs adjustment, or if they should be doing more Roth Conversions.  If you are charitably minded, and many of our clients are, we may need to designate your charitable contributions to come from your IRA, rather than from other assets with more favorable tax treatment. This change would also cause an issue with trusts. Many people name trusts as beneficiaries to help control distributions for various reasons. As it stands, if an ‘accumulation trust’ is used, the highest tax brackets will be reached faster than if an individual person is used. A more concerning prospect is that the Senate has their own proposed Retirement Bill and, in their version, the inherited IRA distribution period would only be 5 years.

We know that change is coming, whatever form it may take. Our government is not the author of security. But rest assured that the team at HSC Wealth Advisors will be here to guide you through the changes.