Creating your Estate Plan is a huge step towards doing everything you can to protect your family and loved ones after you pass away. And while Estate Planning has become fairly easy to do these days (even if you don’t have a huge estate or a ton of assets), there’s more to it than just creating a Will or Trust. If you want a comprehensive Estate Plan, you should understand laws and legal implications that could impact your estate when it needs to be settled - this is one of the main reasons you should become familiar with the ins and outs of The SECURE Act.
Read on, as we offer some clarity on exactly what The SECURE Act is, and give you some scenarios and examples of how it could affect your Estate Plan. This way, you can set up the most informed and effective plan for you, your family and your legacy.
Not totally up to speed on Estate Planning? Check out our Estate Planning 101 article to learn more.
What is The SECURE Act?
The SECURE Act is an act that simplifies the process for small businesses to extend retirement plans and benefits like 401(k) plans to their employees. Ultimately, the act seeks to make it easier for you to save for retirement. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) has many benefits. One major plus is it allows you to put off taking your Required Minimum Distribution (RMD) until you turn 72 years old, a full year and a half later than the previous 70 ½ requirement.
Commonly Asked Questions about The SECURE Act
As with most laws, The SECURE Act can be confusing when you first start diving into it. There are several common questions you probably have, but don’t worry - we’re covering them all here.
When Was The SECURE Act Enacted?
The SECURE Act was a bipartisan bill that formally became law on December 20th, 2019. But most of the changes that resulted from it didn’t go into effect until January 1, 2020.
What Does the SECURE Act Do?
A basic SECURE Act summary makes clear the intention of the law - an attempt to course correct the anticipated pending retirement crisis. The SECURE Act ensures multiple things for both employer and employee. In fact, there are 29 provisions of the act. Some of the bigger ones include:
Making it easier (through tax credits and other benefits) for smaller companies to offer 401(k) plans to their employees
Extending the age you can contribute to your plan
Delaying the age where you need to start taking Required Minimum Distributions (RMDs) so your savings can continue to grow
Implementing the “10-Year Distribution Rule,” which (barring a few exceptions) will require non-spousal IRA beneficiaries to distribute an entire account within 10 years of inheriting it
Possibility for gig employees (contractors, think: Uber drivers, etc) to be eligible to take advantage of 401(k) plans
Who Benefits from the SECURE Act?
There are several sectors of both business owners and those saving for retirement who will benefit from The SECURE Act.
Small business owners - Through tax credit increases, The SECURE Act makes it possible for small business owners to offer retirement plans to their employees. This move alone can make some businesses a more competitive option, so they have an easier time attracting good talent. The tax credits the act offers can make a world of difference for smaller brands and companies who want to offer their people benefits packages that are worthwhile, even if in the past they’ve simply been unable to afford to do so.
Part-time workers - As with so many things in life, working part time can be a blessing and a curse. For a lot of people, one of those huge curses has been that it was generally unlikely for a part-time worker to be eligible to enroll and participate in retirement plans through their companies. But The SECURE Act restricts limitations on participation, giving even part-time employees an opportunity to save for their future.
Retirees - By eliminating the age limit retirees can contribute to plans like IRAs (which was previously 70 ½ years), The SECURE Act makes it possible for you to save longer. You also, as we mentioned earlier, have an additional year and a half before you’re required to start pulling money out in annual Required Minimum Distributions (RMDs).
Is the SECURE Act Good or Bad?
Most things have good and bad aspects to them - especially when we’re talking about laws and money! But the fact that The SECURE Act was overwhelmingly passed (it passed the House 297-120 and the Senate 71-23) shows us just how dire things could become if nothing is done to curtail the anticipated retirement crisis. If left unchecked, generations to come may be forced to deal with the fallout from rising concerns that so many people are sounding the alarm about.
In addition to the long-term retirement problems it seeks to help solve, The SECURE Act comes at a time when people are living longer, so the benefit of being able to save for a longer time period can be tremendously helpful.
All that said, there are some drawbacks to the act as well. Primarily, opponents see The SECURE Act as being largely negative for inheritors. With the removal of provisions that allowed for a “stretch” on distributions (so beneficiaries could stretch withdrawals over a longer time period for tax purposes), now they have to completely pull all assets out of an IRA within 10 years after the owner’s death.
So How Does The SECURE Act Affect my Retirement?
For retirees, there are many changes you need to be aware of that result from the passing of the SECURE Act.
Effect of The SECURE Act on… Required Minimum Distributions (RMDs)?
Required Minimum Distributions (RMDs) were once a mandated distribution of a calculated percentage of your total asset, determined by your age. The amount you had to take every year fluctuated, but you had to take your first distribution when you were 70 ½. Since the passing of The SECURE Act, now you don’t need to take that first distribution until you’re age 72.
Effect of the SECURE Act on… IRA Contributions?
Another big change resulting from The SECURE Act is how long can you contribute to your IRA. Previously, you could only contribute until you were 70 ½. But The SECURE Act removes that restriction entirely, exponentially increasing the opportunity to save.
Effect of The SECURE Act on… my 401(K)?
The SECURE Act gives your employer the opportunity to add a safe harbor feature to 401(k) plans where they can contribute four percent rather than just three percent of your pay.
Yet one more benefit is the inclusion of “lifetime income investments,” which means if you change jobs, you can roll over your lifetime income investment to a new IRS or 401(k) plan. And, remember that even if you’re a long-term, part-time employee, you may be eligible to contribute to a retirement savings plan like a 401(k) - as long as you’ve worked a minimum of 500 hours for the last three years.
Effect of The SECURE Act on… Charitable Contributions?
Charitable contributions have long been an effective way to give money to causes you care about through your estate. But the SECURE Act might be making it an even even better option. You can still donate up to $100,000 annually to a qualifying charity, and while you don’t receive a tax deduction for doing so, your qualified charitable distribution (QCD) is not considered taxable income. Because you can still contribute to your IRA past the age of 70 ½ per the new act, the annual amount is reduced in relation to any contributions you make after 70 ½.
Another Element of The Secure Act - What is the 10-Year Distribution Rule?
The 10-year distribution rule applies to almost all non-spousal IRA beneficiaries. In essence, the rule states that the whole IRA must be distributed in its entirety within 10 years of the original owner’s passing. The 10-year rule affects both traditional and ROTH IRAs.
It’s worth noting that, in addition to spouses, the rule also excludes minor children (until they become of legal age), anyone who’s disabled, anyone who’s chronically ill or those who aren’t more than 10 years younger than the policy owner.
Before the SECURE Act went into effect, beneficiaries could withdraw distributions based on their own life expectancy which was, for many people, a decidedly true tax advantage. The SECURE Act can result in beneficiaries ending up in a higher tax bracket, which is one of its disadvantages.
The SECURE Act seeks to solve a problem that’s been surmounting for decades. With the threat of a dwindling social security and an overall general lack of retirement savings, having an act in place that allows you to save, one that makes it easier for your company to help you (even if they’re small), can be a real win.
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