Monday, February 24, 2020

What You Need To Know About The SECURE Act


By Christopher R. English, President of Lumen Capital Management, LLC

I have been asked by more than a few people to give a brief summary on the SECURE Act, the new retirement laws enacted by Congress at the end of last year.   The passage of the Act was meant to address the grim reality that on the whole, Americans are woefully unprepared for retirement. (1) With wages not increasing as quickly as the cost of living, many savers are unable to put away as much as they’d like and potentially face a lower standard of living in retirement. Policy-makers and employers have recognized this savings gap and have now taken the first step to help retirees manage their money as well as allow for pre-retirees to plan ahead.

Back in May 2019, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was passed with bipartisan support by a count of 417-3. On December 20, 2019, President Trump signed the bill into law, making it easier for retirees to have a reliable stream of income that lasts through retirement—exciting news for the many Americans who are concerned about stretching their retirement dollars.   While the SECURE Act bill proposes over 20 changes, here are 6 major changes that could potentially impact you if you have an IRA or 401(k).  

1. No More Contribution Age Caps On IRAs

Under the current law, a plan participant can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (2) Under the SECURE Act, this age cap would be removed.  

2. Required Minimum Distribution (RMD) Age Raised To 72

Currently, people who have money in 401(k)s or other tax-deferred plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (3)

Under the SECURE Act bill, the new mandatory withdrawal age would be 72. This is helpful for those who are still working or are trying to stretch their savings out for a longer retirement. 

3. Additional Exception To The IRA 10% Penalty Added

The new law would require employers to list a participant’s projected monthly retirement income on their 401(k) statements. This projected monthly income would be based on their current account balance and would give plan participants time to adjust their savings rate and better prepare for retirement.  

The bill would also allow new parents to make a penalty-free withdrawal of up to $5,000 from their retirement account within the first year of their child’s birth or adoption. This money could then be used to cover child-related expenses.

Under the SECURE Act, long-term, part-time workers would be able to finally take part in 401(k) plans. This is great news for women who disproportionately take on part-time work to care for children and aging parents.  

4. Changes To Inherited Retirement Accounts

Under the current law, inherited retirement account distributions can be spread out over the recipient’s lifetime. Under the SECURE Act, a beneficiary would be required to withdraw the money—and pay taxes on it—within a 10-year period. 

This doesn’t affect those who inherit smaller accounts. But for those who inherit larger accounts, taxes will have to be paid over a shorter amount of time, which means a higher tax bill. And, for those who inherit an account in their prime-earning years, their tax burden will increase even more, decreasing the value of the account. Surviving spouses and minor children are exempt from this rule.

5. More Annuity Options

Annuities are a type of insurance that guarantees a monthly income in retirement. They’re usually part of pension plans. Annuities aren’t popular 401(k) options because the employer can be sued if the insurance company goes out of business or fails to pay a claim. 

Under the SECURE Act bill, the liability would be removed from the employer. This means more employers could offer annuities to their employees without having to worry about being held liable for unpaid claims. The benefit to you is that you get more options to diversify your retirement income through different types of investments. 

6. Lifetime-Income Provision

There’s plenty of advice on how to accumulate wealth using your 401(k), but no one really talks about how to manage your wealth once you retire. The new lifetime-income provision, coupled with annuities, would ensure retirees don’t outlive their money. 

If your employer doesn’t offer annuities, the bill would allow you to roll your accounts over to an IRA so you could continue contributing to your retirement.   

How Should You Respond To These Changes?

There is more to the Act than what we’ve described above.  This article is meant to be a summary of some of the main points now impacting retirement and retirement planning.  If you’re concerned about how the SECURE Act will affect your path to retirement and your investment strategy, now is a good time to meet with a financial professional to review your plan and check to see if any updates should be made in light of these legislative changes. If you’d like to learn more about how Lumen Capital Management can help meet your investment and retirement planning needs, reach out to my office at 312.953.8825 or lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.
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posted by CR English at 9:42 AM

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