This new legislation has more than 1,700 pages and includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
The SECURE Act is significant legislation that makes many changes to our retirement system. The overall theme of the Act is to make it easier for businesses to offer retirement plans for their employees and for individual taxpayers to save for retirement. Unfortunately, the Act eliminated most of the provisions that allowed beneficiaries to stretch distributions from IRAs and defined-contribution plans over their life expectancies — with some exclusions such as spouses, who can still take advantage of the stretch strategy.
In this first blog post about the Act, we will provide highlights of several key provisions of this legislation that may impact employers and taxpayers. During the coming weeks, we will create more in-depth blog posts tied to each key provision addressed in this post. Each blog post will focus on the impact of the provision to the taxpayer, as well as ideas and planning opportuntities that may assist taxpayers.
Here are several highlights:
|Employer Liability Protection for Annuities in Plans||The Act creates a statutory safe harbor for the selection of annuity providers who are added as an investment option within a 401(k) investment menu. Plan fiduciaries can rely on representations from insurance companies regarding their capabilities to provide guaranteed lifetime income to participants, relieving them of the liability for selecting and reviewing the annuity. This is seen as a big win for annuity providers, as life insurers will be able to make annuities more accessible to defined contribution plan participants who may be looking for protected lifetime income in their retirement plans.|
|Disclosure Regarding Lifetime Income Options||Defined contribution plans (e.g., 401(k) plans) are now required to provide participants with annual statements that reflect monthly lifetime income streams. Account balances need to be expressed as both a qualified Single Life annuity as well as a Joint and Survivor annuity.|
|Portability of Lifetime Income Options||Lifetime income options are now portable if they are no longer available in the plan. These options can now be transferred as direct rollovers to either an IRA or other retirement plan.|
|Increased RMD Age||The age at which required minimum distributions (RMDs) must start increased from age 70½ to age 72 for individuals who turn 70½ on or after 1/1/2020.|
|Age Limit Eliminated for Traditional IRA Contributions||The Act allows contributions to a traditional IRA after age 70½. Once a person reaches age 72, traditional IRA owners may be contributing and distributing. To contribute, individuals must have compensation income.|
|Modifications to Post Death RMDs (i.e., Inherited IRAs)||
Unfortunately, what Congress giveth, Congress taketh away.
A provision of the Act eliminates most of the provisions that allowed beneficiaries to stretch distributions from plans (including traditional and Roth IRAs) over their life expectancies. There are some exceptions that include, but are not limited to, the plan owner’s spouse and minor children (who must distribute within 10 years upon reaching the age of majority).
Beginning with a plan owner’s death in 2020, beneficiaries who inherit a plan will be required to distribute the entire plan balance within 10 years of the plan owner’s death. This creates a number of planning opportunities for advisors, which include having conversations with IRA owners about who they want to name as a beneficiary of an IRA.
Fortunately, this provision does not apply to nonqualified annuities, so beneficiaries can still stretch distributions over their life expectancies.
Should you have any questions regarding the SECURE Act, please contact the Retirement Strategies Group at (800) 722-2333, or email us at RSG@PacificLife.com.
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