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How the SECURE Act Could Affect Your Retirement Planning?

Many Americans haven’t saved enough to fund their retirement and plan on Social Security to make up the difference.
Unfortunately, many experts believe that the Social Security system may not be sustainable in its current form. The SECURE Act attempts to reconcile these problems by encouraging employers to help full-time and part-time employees save.

Let’s take a closer look at the SECURE Act and how it could impact your retirement savings strategy.

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What Is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, aims to increase access to tax-advantaged accounts and prevent older Americans from outliving their assets. After passing the House in July and the Senate in December, the bill was signed into law by President Trump on December 20, 2019.

According to GoBankingRanks, 64% of Americans expect to retire with less than $10,000 in their retirement savings accounts and 48% were not concerned about the size of their retirement savings. About 46% of respondents said that they use a savings account as their primary method to save for retirement rather than a 401(k) or another investment account.

Retirement savings of Americans
Source: GoBankingRanks
The SECURE Act is designed to incentivize employers to help employees save for retirement rather than relying on them to save on their own. While plan administration has been expensive in the past, the bill has several provisions designed to reduce or eliminate these costs and ultimately boost 401(k) and SIMPLE IRA participation rates.

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Key Provisions of the Act

The SECURE Act includes several changes designed to help Americans save more for retirement. While these provisions aren’t designed to solve the retirement savings crisis, they represent a step in the right direction by seeking to improve participation rates among part-time workers and add flexibility to 529 accounts to repay student loan debt.

The bill’s key provisions are designed to:

  • Simplify 401(k)s for small businesses by increasing the contribution cap for automatically enrolling workers in ‘safe harbor’ retirement plans from 10% to 15% of annual pay
  • Provide a $500 per year tax credit to employers that create a 401(k) or SIMPLE IRA plan with automatic enrollment
  • Empower businesses to sign up part-time employees who have worked either 1,000 hours during the year or have three consecutive years with 500 hours of service
  • Encourage plan sponsors to include annuities as an option by reducing their liability if the insurer cannot meet its financial obligations
  • Increase the longevity of retirement plans by raising the age for required minimum distributions (RMDs) from 70.5 to 72
  • Permit the use of tax-advantaged 529 accounts for qualified student loan repayments up to $10,000
  • Permit penalty-free withdrawals of $5,000 from 401(k) accounts to defray the cost of having or adopting a child

The bill also removes the so-called ‘stretch IRA,’ which enables non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout within 10 years for heirs of account holders who die starting in 2020.

How Does It Impact Retirement Planning?

Many small businesses could soon begin to offer new retirement plans to both full-time and part-time employees. If your employer offers a retirement plan with matching contributions, most financial advisors recommend maxing out the matching contribution amount before contributing to Roth IRAs or other tax-advantaged accounts that aren’t employer-sponsored.

While the new bill encourages annuities, most advisors recommend against them due to their high fees and the risk that ‘guaranteed’ lifetime income could stop if the issuer (i.e., insurance company) goes bankrupt. The bill’s new safe harbor provisions prevent annuity holders from suing retirement plans in the event that an annuity issuer fails to make payments, which could increase these risks for the annuity holders.

The ability to use 529 educational savings accounts to repay student debt could provide some people with an attractive way to reduce their debt, improve cash flow, and ultimately save more for retirement over the long term. That said, financial advisors don’t always recommend withdrawing tax-advantaged savings accounts to repay debt.

Finally, the elimination of the ‘stretch IRA’ means that IRAs may no longer be the best way to pass wealth down to younger generations. Instead, life insurance could become the most tax-efficient asset to pass non-spousal beneficiaries. The best estate planning option is highly dependent on each individual’s and/or family’s unique circumstances.

For more information and specific advice, consult with a financial advisor to review your unique situation and decide on the best options to reach your financial goals.

The Bottom Line

The SECURE Act incentivizes businesses to help employees save for retirement while providing additional flexibility to Americans when using their accounts. While there’s still a long way to go in resolving the country’s retirement crisis, the bill’s provisions open new doors that every American should explore to maximize their retirement savings.

Be sure to check our News section to keep track of the latest updates from the mutual fund industry.

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Feb 03, 2020