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SECURE Act Passes with Big Changes to the American Retirement System

After sitting in the Senate for months, the SECURE Act has finally been signed into law, bringing with it some of the biggest legislative reform to retirement savings in decades.

Focused on creating positive changes in the American retirement system, the Act has generated endless questions about the impact on savers, employers and employees. With Trump’s signature, these questions finally have answers.

News for Retirement Savers

Some of the changes aimed at supporting retirement savers include the adjustment of the RMD age from 70 1/2 to 72, and lighter restrictions on 401(k) eligibility for certain employees. A statement on the SECURE Act from Vestwell explains that, “according to the bill, employees who work 500 or more hours during any consecutive three-year period can participate in their plan and there are other protections in the Act for part-time employees. This is meant to protect participants who may take a leave of absence for parental leave or otherwise, and to generally support more balanced life decisions.”

In addition, although received with mixed responses, employees may have access to lifetime income products, such as annuities, through their employer-sponsored plans. “This has been seen as a positive because annuity products can be great additions to an overall comprehensive financial plan, however the downside is that annuity products can be very complex, and often times come with lots of terms and conditions, and disclosures” says Certified Financial Planner, Josh Hardman. “My fear is that the products could be sold to a participant without full knowledge of its ‘ins-and-outs,” Josh explains.

According to Vestwell’s statement to plan sponsors, “There is still a lot here to figure out. Because of the complexity of annuities, it can be challenging to incorporate them into a retirement plan without full plan portability or properly disclosing costs and other features.”

News for Employers

For employers, the SECURE Act will now allow Multiple Employer Plans (MEP’s) to open their gates to non-related business. While MEP’s are not a new concept, they have always been restricted. Companies who wanted to participate in a pooled plan needed to have business commonalities. With the SECURE Act, the MEP space is changing to allow non-related businesses to join together, with the hopes of helping smaller businesses gain access to investments and provisions that would otherwise only be available to larger companies.

In addition to pooled plans, there is now a tax credit aimed to help small business jump start their 401(k) plans. The SECURE Act is now supporting small business 401(k) start-ups by providing up to $5,000 in tax credits.

Eliminating the Stretch

With the elimination of the “Stretch IRA,” the new law requires that the inheritors of Traditional IRAs make required distributions from the IRA (taxable) over a 10-year period after the owner’s death, rather than the current law, which allows the inheritor to stretch those distributions over the course of their lifetime.

The elimination of the “Stretch IRA” will most likely place a larger financial impact on those that are inheriting traditional IRAs from wealthy account owners. The previous version of the law was a seen as a way for wealthy IRA owners, to skip a generation and leave the IRA balance to their grandchildren, rather than their spouse or children. The requirement being, the balance would need to be stretched over multiple decades. Now, that balance can no longer be held. It must be distributed over just one decade following the owner’s death.

For some, this could create quite a large tax bill. Unfortunately, the SECURE Act had to recoup some of the lost tax revenue when it created some of its provisions such as the increase RMD age. With the elimination of the original “stretch” provision, the law can now pass the tax bill on to the wealthy. In fact the Congressional Budget office is anticipating this change will generate over $15 billion in additional tax revenue within 10 years.2

Though there could be some tax issues for the wealthy, the overall goal of supporting the average American retirement saver remains in focus. With the median 401(k) balances for someone age 30-39 at $16,500 and ages 40-49 at $36,000 – the average American is facing huge retirement savings challenges.

“Ultimately, there is a massive shortage in retirement savings, and as a country, I believe we need to be doing more. This legislative reform is hopefully going to help,” says BCJ Financial Group Retirement Benefits Coordinator, Sara Johnson.

 

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 Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 19-176

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