By Bob Carlson
Founder & Editor, Retirement Watch & The Center for Retirement Security
Most Americans never heard Word One about it.
The SECURE Act rolled through Congress in late December 2019, and was signed into law on Dec. 20.
There are both good and bad sections in the law.
The bad part, for many Americans, is a retirement killer.
So it’s time to set the record straight, and adjust your retirement and estate plans accordingly.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act makes major changes in retirement plans, especially 401(k)s and IRAs.
Here’s a review of the key SECURE Act provisions for my readers, and how you should respond to them.
No Age Limit on IRA Contributions
Since the beginning of traditional individual retirement accounts (IRAs), contributions haven’t been allowed after age 70½, even if the owner still was working.
There has been no age limit on Roth IRA contributions.
The SECURE Act removes the age limit, allowing contributions to traditional IRAs regardless of your age.
The change applies to tax years after 2019.
Keep in mind that to make a contribution to either type of IRA during the year, you must have at least an equivalent amount of “earned income,” meaning income from a job or self-employment.
Note that investment income and pensions don’t count.
Later Starting Date for RMDs
The starting date for required minimum distributions (RMDs) is changed from 70½ to 72.
(There’s really no good explanation that I can find for why Congress chose 70½ as the starting date all those years ago.)
The half-year starting point in this new law confused many people.
With life expectancy increasing, people are working longer – and to end the confusion, Congress decided to delay RMDs until age 72.
But the change is forward-looking.
Those already obligated to take RMDs have to continue.
Only those who turn 70½ after December 31, 2019, are affected by the new law.
So, if you turned 70½ in 2019, you have to take that first RMD by April 1, 2020 (if you didn’t already take it).
If you turned 70½ previously, you have to keep taking RMDs on the old law’s schedule.
Annuities in 401(k)s
Economists and many financial advisors (including me) say most people should have a portion of their retirement in annuities that pay guaranteed lifetime income.
But few people do that, and very few 401(k) plans offer annuities among their payout options.
The SECURE Act aims to change that.
Many employers say their 401(k) plans don’t include annuities because the legal risks are too high.
They don’t want to be sued if a plan member thinks the employer should have selected a different annuity or insurer and especially if the insurer has financial problems.
The new law reduces an employer’s fiduciary liability for the choice of annuity or insurer.
The SECURE Act also provides that a plan member can take the annuity with him or her after leaving the employer without paying a penalty.
In other words, the annuities will be portable.
You’re likely to see annuity options added to 401(k) plans in the coming years.
Large employers probably can negotiate annuity deals that are better than those you can obtain in the individual annuity market.
The bad news is not all employers will do that.
Consider any annuity option you’re offered through a 401(k) plan, but compare it to the payout you’d receive from annuities available in the individual market.
As I always say regarding annuities, though, be sure to shop around.
The last thing you want to do is get stuck in an annuity wrought with hidden fees and penalties.
In my next post, I’ll explain “The End of the Stretch IRA,” and what it could mean for you and your retirement plan.