The SECURE Act has been keeping everyone busy: Professionals in the financial services industry have had to adjust to some changes and many of their clients are wondering how these modifications will affect them. So, let’s talk about it.
The Setting Every Community Up for Retirement Act, passed in 2019, “includes 29 provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.” (Source)
Well, that sounds pretty good, but what does that really mean for YOU?
At Denver Private Wealth Management, we work with new, established, and pre-retirement investors. Here are some key points that you should be aware of, no matter where you are on your financial path.
The New Investor
Under the SECURE Act, the inherited IRA’s younger clients will have different withdrawal requirements. In the past, you could create a “stretch” IRA by distributing the value of the account over your lifetime if you were considered a designated beneficiary. Since the money pulled out of a traditional IRA is taxed as ordinary income, this was seen as a unique planning tool used to lower the income tax attributed to the inheritance.
With the recent changes to the tax code, you can no longer “stretch” the distributions but must distribute the full account balance over a 10-year period. However, should the unthinkable happen and you are a surviving spouse, you can still treat it as your own personal IRA.
The Established Investor
With the new bill, more workers will have access to 401(k) plans due to some sweeping changes. For example, small businesses will have the ability to band together and offer a 401(k) plan as a collective group.
Here’s how it works: In the past, when Joe’s Barbershop was too small to offer a 401(k) plan, the owner’s options were limited. Now, the owner can pair up with Mike’s Barbershop and Peter’s Pizzeria to create a 401(k) plan for their employees.
Additionally, more employees are eligible to participate in 401(k)s. In the past, employees had to work 1,000 hours a year to be considered an eligible employee. That number has now dropped to three years of 500-annual hours for eligibility; a big change for part time employees.
But take note: Be careful as annuities are now being allowed inside of 401(k) plans. Annuities as an investment vehicle make sense from a behavioral perspective, but the guarantees they offer might cost you because of missed opportunities and high internal fees. The onus is on the insurance company to make sure the annuities offered inside the 401(k) plans are suitable. That could be a gamble.
The Pre-Retirement Investor
Guess what? People are living longer in retirement! This inspired some changes to the Required Minimum Distribution (RMD) parameters which start at the age of 72 beginning in 2020 (the previous age was 70 ½). This gives you more time to find artificially low years of income and convert your pre-tax income into post-tax income through Roth conversions.
Additionally, you’re now allowed to contribute to an IRA after your RMD has started and, as long as you have earned income, there is no age limit on IRA contributions.
At Denver Private Wealth Management, we understand that these changes can be overwhelming and confusing. That’s why we’re here to answer your questions and make sure that you fully understand the risks and rewards of investing.
Denver Private Wealth Management is an independent fee-based financial planning practice with 50+ years of experience in the financial industry. DWPM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at email@example.com.