A new bill before Congress—named the Setting Every Community Up for Retirement and Enhancement or SECURE Act—is likely to change options for investors as they prepare for retirement. In a recent Lifetime Income podcast Jim Puplava explained how things are changing and what it means for retirement planning.
The SECURE Act makes several changes to retirement investment regulations. One of the largest changes is that the act will allow 401(k) style plans to offer annuities. They’re a type of insurance contract that guarantees a monthly income stream for the retirees’ life.
This allows employers to incorporate a feature similar tot those found in old-fashioned pension plans called defined-benefit plans, which were basically annuities in their operation. Effectively, retirees and their spouses could have access to a guaranteed source of income directly in their 401(k) when they stop working. This is beneficial in today’s low interest rate environment and without it retirees have to rely on what they receive in their 401(k) to produce income in retirement.
The act also repeals the age cap for contributing to traditional individual retirement accounts from age 70 ½ , Puplava stated. The age at which you must take mandatory withdrawals was bumped up to 72.
The act allows employers to band together to offer 401 (k) plans and gives part-time employees the chance to participate in 401 (k) plans. It also allows withdrawals of as much as $10,000 from a 529 plan for repayment of student debt.
What Are the Drawbacks?
The downside to the act is that in order to pay for it, the act limits IRA stretches to 10 years. Under the current system, an inherited IRA can be distributed over 30 years, known as the stretch, spreading out distributions in what is hopefully a lower tax bracket.
Under the change, more money distributed from such an IRA will be taxable at a higher rate. This is expected to generate about $16 billion in new taxes, Puplava noted.
Though some will pay more in taxes, there may be other options to offset this change, such as setting up retirement in a no-tax bracket, as previously discussed on the show. Overall, the act is likely to help those planning for retirement, especially with the Fed hinting it may be ready to begin lowering interest rates again, potentially back down to zero.
“This act does enhance retirement options with 401(k) plans,” Puplava said. “What Congress is trying to do here is offer the annuity option that would allow future retirees the same option that their parents used to have with the defined benefit plans. … to manage their savings in a low interest rate environment in a highly valued, volatile stock market.”