Regardless of asset level or income, those saving for retirement have to deal with increasing fears of outliving their assets, as well as the effect of changing employment trends on company-run 401(k) plans.
New rules now in effect attempt to address these issues for individuals, business owners and employees.
The Setting Every Community Up for Retirement (SECURE) Act, which went into effect in early 2020, contains provisions that should give individuals extra runway to save for retirement, as well as make it more appealing for companies to set up employee plans.
From an individual perspective, I think some of the rationale is to simplify retirement plans and make them a bit more viable," says Bill Ringham, vice president and director of Private Wealth Strategies at RBC Wealth Management-U.S.
Here are four ways the SECURE Act could impact your retirement.
1. Extra time for retirement savings
Those nearing retirement age will now have some extra time to continue to bulk up tax-advantaged IRA plans or employee-sponsored 401(k)s as the age for starting mandatory withdrawals has been raised from 70.5 to 72.
That may not seem like a major change, but Ringham says the extra time for tax-deferred growth should be welcome for many investors, particularly as increasing life spans mean planning for a longer retirement.
Let's say you have a couple million dollars in your IRA. A couple more years of growth in your investment portfolio could be significant for the underlying assets," Ringham says.
The SECURE Act also allows for continued IRA contributions beyond age 70.5, so those who continue to work later in life can also continue to build their portfolio. This could mean additional investments of $7,000 per year for an individual, or $14,000 for a couple.
2. Eliminating the stretch for beneficiaries
Another important part of the SECURE Act is the elimination of what's known as a "stretch" IRA, which allowed non-spouse beneficiaries who inherited an IRA account to withdraw the funds gradually over the course of their lifetime, with the minimum annual distributions calculated based on expected lifespan.
It was like an annuity stream for those who decided to allow it to grow and take out only what they had to every year," says Ringham.
The change means designated beneficiaries will now only have 10 years to withdraw the funds, shortening the window of tax-free growth and forcing beneficiaries to draw the account down in larger amounts. This could push the beneficiary into a higher tax bracket, says Ringham. One way to deal with this would be for the account owner to convert part or all of the traditional IRA to a Roth IRA, where withdrawals by the beneficiary are not subject to income tax.
The rule change also impacts those who had previously used "stretch" IRAs as a way to pass on funds to children gradually, rather than all at once.
Sometimes clients have named a trust for their child's benefit as a beneficiary, and then the distributions would flow from the IRA to the trust and out to the beneficiary over their life expectancy, which controlled the IRA distribution and made it more restrictive," Ringham explains.
In light of the new rules, Ringham recommends engaging a financial advisor to understand the implications for wealth and succession planning.
For those individuals that have a fairly significant IRA, a review of beneficiary designations with your advisor is very prudent to make sure they're still as efficient under the SECURE Act as they were before," says Ringham.
3. Incentives for small businesses
The SECURE Act also has several implications for business owners that offer employer-sponsored 401(k) plans or have considered implementing such plans, says Tracy Hanson, senior manager of Retirement Solutions at RBC Wealth Management-U.S.
The act offers "some of the best incentives we've seen for these small-to-mid-sized business owners to establish a plan for their employees," Hanson says.
Perhaps chief among those incentives are increases to tax credits available for businesses that establish a 401(k). Employers will now be able to claim up to $5,000 in each of the first three years after establishing a plan, with an additional $500 credit available for companies that automatically enroll employees.
That's a significant incentive for a business to establish a retirement plan," says Hanson. We're anticipating more employers will make that available now."
Another incentive is a removal of barriers to Multiple Employer Plans (MEP), in which more than one company joins together to form a plan for their combined employees. In theory, Hanson explains,you get the benefits of the economies of scale by combining with other plans because you'll have higher balances and a higher number of participants," in addition to being able to combine administrative tasks associated with the plan.
Another key change of the SECURE Act, she says, combines with previous guidance from the Department of Labor to remove the so-called “one bad apple" rule. The rule previously disqualified all of the company plan owners if just one failed to meet the qualifications, providing increased incentive for companies to join MEPs.
Plans will also be opened up to part-time employees. This has the potential to raise costs for employers, because each part-time worker may contribute less to the plan than a full-time worker, Hanson notes. But the change is a win for part-time employees who were not able to previously contribute to their employer's retirement plan.
4. Adding annuities to 401(k) plans
The SECURE Act will also make it more attractive for 401(k) plans to offer annuities by better defining the liability of those offerings. This is significant as annuities have obvious appeal due to their potential to provide a guaranteed income stream at retirement, but have only been used sparingly in 401(k) plans because of the liability issue.
Hanson says she expects to see many plans begin to offer annuities now that the issue has been resolved, though investor knowledge about annuities and their potential benefits is limited.
I think it will be up to financial advisors and plan sponsors to provide education on the benefits of these types of products to the participants," she adds. One of the biggest fears for Americans is running out of money in retirement. And this is a way for plan participants to mitigate some of that risk within their 401(k)plan."