The Secure Act is a retirement reform-focused bill that would bring forth significant changes to retirement plan rules. The question is: are these changes really a good thing?
It received almost unanimous support from the House of Representatives in May. It has now been sent it to the Senate for consideration with what can only be looked at as a mandate for action. The bill proposes 29 new provisions. It advertises making it easier for workers to become eligible for retirement benefits and for small businesses to offer 401k plans. The maximum age for IRA contributions would also be changed to 72 (right now, its 70 ½), giving people more time to save for retirement. These changes sound great to some, but they pale in comparison to the downsides it would bring.
The Secure Act would throw a wrench into the status quo of financial planning by changing the rules that apply to inherited retirement accounts. Right now, a non-spouse beneficiary can inherit a retirement account and not be required to make a withdrawal until they themselves reach age 70 ½, therefore stretch the tax shield of the IRA potentially over decades. Yes, the Secure Act would raise the required distribution age to 72, but if the account holder passes away, it requires non-spouse beneficiaries to withdraw the money within ten years of the original account owner’s death. The person who inherited the account would be required to add these withdrawals to their taxable income over the next decade, consequently putting them at risk of a higher tax rate ad barring them from saving this capital for their own retirement.
The Act also seeks to update the safe harbor provision for plan sponsors to have annuities inside of 401k plans without taking on any legal liability. Life and annuity groups are celebrating the promise of this change, as the upfront expense of annuities often provides a high commission to those selling them. Annuities are inherently complex and notorious for having a high upfront cost and fees that our firm believes do not justify the benefits the product features. If not highly regulated, this proposal will have adverse results for participants who are encouraged to purchase annuities.
Fogel Capital Management, Inc. is dedicated to helping our clients navigate these potential changes in our country’s economic landscape and provide solutions. Call us today at (772) 223-9686 for a free portfolio assessment to see how the Secure Act would impact your retirement and what you can do about it!