Saving for retirement requires understanding numerous rules, but new legislation passed by Congress – the SECURE Act – changes some of those rules significantly. And retirement planners say that means big changes to how Americans save money for their golden years. The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, took effect Jan. 1 and is designed to help more people set aside more money for retirement.
Among the new bill’s features: removing the age limit restricting contributions to individual retirement accounts; raising the age when people take required minimum withdrawals (from age 70 ½ to 72); and closing a loophole that allowed investors to stretch the tax advantages of IRAs across an heir’s lifetime.
While financial professionals say parts of the new law can negatively or minimally impact retirement savers, knowing how to navigate the law can make it work for them, says Jay Sharifi, an investment advisor at Legacy Wealth Management (www.lwealthmanagement.com).
“One of the plus sides of the SECURE Act is that it removes some of the hurdles that prevent people from saving and gives more people access to workplace retirement accounts,” says Sharifi, author of Building a Better Legacy: Retirement Planning for Your Lifetime and Beyond. “It makes it easier for small businesses, through tax incentives or joining multiple-employer plans, to offer retirement plans to their employees. “But the bottom line is this law affects many different types of retirement plans, and it’s important to know how it changes your ability to save, your tax situation, and how you can use the funds over a period of time.” Sharifi suggests four ways to adjust retirement strategy in the wake of the SECURE Act:
Consider a Roth IRA conversion.
With the SECURE Act removing the 70½ age cap for IRA contributions, those who are working longer can continue saving for retirement. In a Roth IRA that’s converted from a traditional 401(k), you take money that is currently treated as tax-deferred and converts it into an account that grows tax-free. “A Roth IRA is a retirement savings account that allows the saver to withdraw savings tax-free in retirement, and they tend to offer more investment options than a Roth 401(k),” Sharifi says.
Reassess “the Stretch.”
One drawback planners see under the SECURE Act is that a non-spouse beneficiary who inherits an IRA has to draw down on the account, and pay income tax on it, within 10 years of the account owner’s death. Previously, a “stretch IRA” rule allowed them to stretch those withdrawals over their lifetime. This change can create a big tax burden. Sharifi says one option for larger estates to minimize the tax hit is this: “Rather than designating a trust as the beneficiary of an IRA, name each heir individually as a beneficiary so the tax bill can be paid over the decade by each.”
Build cash value with life insurance.
“The modern life insurance product gives the saver the ability to build cash value in that policy,” Sharifi says. “That cash value grows without tax liability, giving you access to that cash and accumulating at a more acceptable rate of return than most bank rates.”
Be careful about annuities.
One of the controversial parts of the SECURE Act is a safe harbor for 401(k) sponsors, making it easier to include annuities in their retirement plans by taking employers off the hook for assessing an insurer’s financial health. “Annuities can offer a guaranteed lifetime income stream, but this loophole in the bill could lead people astray due to more complicated and expensive annuities,” Sharifi says. “The SECURE has some sweeping changes to retirement,” Sharifi says. “While it’s intended to make your savings last longer, there’s a lot to know to make sure you do.”
Jay Sharifi, author of Building a Better Legacy: Retirement Planning for Your Lifetime and Beyond, is founder and investment advisor with Legacy Wealth Management (www.lwealthmanagement.com). He has passed the Series 65 securities exam and holds a life and health insurance license in Virginia. He has an MBA from the Keller Graduate School of Management and a Certificate of Financial Planning from Georgetown University.