SECURE at Last

January 31, 2020

In the May 2019 blog Fixing the Retirement Income Crisis - Winners and Losers, we profiled the Setting Every Community Up for Retirement Enhancement Act, better known now as the SECURE Act. Though its swift passage appeared to be a sure thing, Congress went on to other matters – until the SECURE Act was added to the spending bill passed into law on December 20th. Below we highlight several changes that will impact retirement savers and their heirs. It is far from a comprehensive review of the legislation, which also includes provisions to make it easier for small businesses to offer retirement plans to their employees and to allow distributions from 529 plans to help pay down student loans.

Inherited Retirement Accounts
Under the old rules, when someone other than a spouse inherited a regular or a Roth IRA, the distributions could be “stretched” over the rest of their lives, a great benefit for children and an even greater benefit for grandchildren. Now such IRAs (inherited in 2020 and thereafter) must be liquidated within ten years of the owner’s death (there are a few exceptions). This change may have a significant impact on plans to leave regular or Roth IRAs to children or grandchildren.

Required Minimum Distributions & IRA Contributions
Effective January 1, 2020, the legislation extends the start date for Required Minimum Distributions (which apply to all retirement accounts except Roth IRAs) from 70 ½ to 72 and allows those working past 70 to make IRA contributions.

Until now, employers offering 401(k) plans have been reluctant to offer “lifetime income products,” otherwise known as annuities, out of fear of employee lawsuits should the annuity provider, typically an insurance company, fail to make promised payments. The SECURE Act offers employers some protection in this unfortunate scenario.

Annuities are not inherently good or bad. A steady source of lifetime income can reduce risk for some retirement plans, but there are trade-offs. Annuities are complicated contracts (just try reading the prospectus) and they can be very expensive. Making annuities more widely available in 401(k) plans could help address the “retirement crisis” if they are used judiciously. Or the SECURE Act could lead to a generation of savers opting for high-fee, difficult to understand investments they don’t need. We are more concerned than hopeful.