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The Secure Act has been languishing in the Senate for some time. However, that doesn’t mean it won’t pass and, if it does, it could have a significant impact on your retirement accounts. While many would consider the changes beneficial, others aren’t so sure. If approved, the Secure Act changes how inherited IRAs would be managed, and not everyone is thrilled about it.

How the Secure Act Changes Heir Rights

If the Secure Act goes into effect, it will fundamentally alter how non-spouse heirs of an IRA can handle the money. Under current law, a non-spouse beneficiary has the ability to stretch out over the course of their life expectancy the minimum required distributions; an approach often referred to as the “stretch IRA.”

The current approach allows more of the money to remain in the account, giving the IRA the ability to grow tax-deferred for longer. Plus, since the withdrawal sizes would potentially be smaller, it provides the heir with a chance to reduce their tax liability each year.

However, if the Secure Act becomes law, the stretch IRA method won’t be available. Instead, non-spouse heirs would have to empty the account within ten years. This means, for heirs who would usually have spread the withdrawals out over a longer period, they have to remove more money annually than they would under the old law. Since the withdrawals will be larger and are taxable, their tax burden goes up accordingly.

Plus, the increase in the heir’s tax bill might not just impact the withdrawals. It could also affect their earned income, making larger payments even more costly.

Estate Planning for the Secure Act

Since the Secure Act would alter non-spouse heir rights for IRA, it may fundamentally change how a person handles estate planning. The new rule could be a burden on the original IRA owner’s family, so they might choose a different tactic.

Under current law, younger heirs get a significant benefit. They can make smaller withdrawals over the course of their life, allowing them to benefit substantially from compounding. In some cases, it may make leaving an IRA to a child – say, to help fund a grandchild’s college education – a less viable option.

Not All Heirs Impacted

It is important to note that not all heirs would be impacted by the change. Aside from spouses, beneficiaries who are 10 years (or less) younger than the account holder, the minor child of the account holder, or are chronically ill or disabled aren’t affected by this part of the Secure Act (if it becomes law). However, an heir that falls into every other category would be, so account holders may choose to leave their IRA to another family member who would get the most benefit instead of the person they would prefer.

The Secure Act hasn’t passed yet, and it’s possible that it never will. But, by understanding how it can impact an inheritance, account holders can make plans now. That way, if the Secure Act becomes law, they can adjust their strategy if necessary.

Do changes to heir rights worry you? Why or why not? Share your thoughts in the comments below.

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The Secure Act recently passed unanimously through the House Ways and Means Committee. It is a small bill in some ways. Nevertheless, it represents the biggest change to private retirement plans that we’ve seen in quite some time. More and more people are reaching retirement age without adequate savings, so it’s important that we take steps like these.

What is the SECURE Act?

The Secure Act is a bill that recently passed through the House Ways and Means Committee. SECURE is actually an acronym. It stands for the Setting Every Community Up for Retirement Enhancement Act of 2019. It’s also known as H.R. 1994.

The primary aim of the bill is to make it easier for people to sign up for 401(k) retirement plans. In particular, it helps ease the difficulty of those working for small businesses to access this crucial component for security in retirement.

3 Ways the Secure Act Helps with Small Business Retirement

If you work for a small business then you might not currently have access to a good 401(k) plan through your employer. The Secure Act should change that. It has three key components to that end:

1. Encourages Benefits

More than anything else, the Secure Act encourages small businesses to offer 401(k) benefits to their employees. Of course, people can get social security after retirement, but it’s not enough to support the average person. Therefore, we each need to have other retirement savings plans. The 401(k) is the most popular of those plans. However, small businesses often don’t offer those benefits. A series of details in the Secure Act should entice small businesses to change that around. Moreover, there are provisions that will make it easier for employees to understand and harness the benefits of these plans.

2. Offers Businesses a Tax Incentive

In order to further motivate small businesses to make those changes, the Secure Act has a built-in incentive. Any small business that creates a 401(k) plan or begins offering automatic enrollment for one may qualify for a brand new tax credit. They’ll get $500 back just for creating that plan, a credit that applies for three years.

Plus, there are a variety of details that make it easier for businesses to offer these plans. For one thing, small businesses are allowed to join together in groups to offer these plans. This makes it easier for the business to deal with their own costs and hassles.

3. Requires Certain Benefits for PT Workers

Of course, like many bills, this one has a carrot and a stick. Hopefully, small businesses will be inspired by the tax incentives to offer 401(k) plans to employees. However, in case they aren’t, some specific new rules are in place. The big one is that any small business that has part-time workers who are long-time employees much allow them to participate in the 401(k) plans that they set up. This is a protection for part-time workers who need retirement income as much as, if not more than, full-time employees.

Will the Secure Act Help You in Your Retirement?

Ultimately, you are responsible for your own retirement savings. If you don’t have a private retirement savings plan, then you should remedy that as quickly as possible. For some people, that’s just a matter of ease of access. Those are the people who will benefit most from the Secure Act. People who are already saving for retirement through 401(k) plans or other means will not likely see any change as a result of this bill. However, those people on the margins, particularly long-term part-time employees, can definitely benefit from what this bill has to offer.

That said, some of the provisions in the bill could benefit anyone interested in saving for retirement through 401(k) plans. Such details include:

Currently, employers can auto-escalate their employees’ 401(k) contributions to 10% of their pay. The new bill increases that amount to 15% which can mean significantly more retirement savings for those people.
Graduate students and post-doctoral students will both be able to include their stipends and fellowships as a means for saving for retirement, something that was not previously available.
Home healthcare workers will also see benefits that allow them to save more than previously allowed.
Loans based on credit cards will be prohibited, which is important because they tend to ultimately result in less money in the accounts.
Even though you’ve set that money into a retirement account, you will be able to withdraw some penalty-free if you need money to cover the cost of the birth or adoption of a child. This is an incentive to encourage more young people to start contributing to their own retirement. The earlier you start, the better off you will be.

2 Other Things the Secure Act Does

The thrust of this new bill is all about what it does to help small business employees save for retirement through 401(k) plans. However, there are a couple of extra things in the bill as well. After all, the 401(k) might be the most popular retirement savings plan, but it’s not the only one. Here are two more things that the new bill does:

1. Changes IRA Age Rules

The IRA is another popular retirement plan. The bill has two components that affect it:

Takes away the maximum age for IRA contributions. You can keep contributing to your IRA for longer. That’s important because people who are working later into retirement can set aside more money. Then when they need their retirement income, there’s more to access.
Increases the age for required mandatory distributions. It used to be that you had to start taking money out of your IRA by age 70.5. The new bill increases that to age 72. Again, this allows people who are working later into retirement age to benefit more from their IRA.

In addition to working longer, people are living longer. They need that retirement money into their 80s, 90s, and even past age 100. Therefore, these small changes can actually make a big impact for some retirees.

2. Expands 529 Savings Plans

The 529 savings plan isn’t for retirement per se. Instead, it’s tax-friendly savings account for future education costs. If you have children, you should set one up. Oftentimes, parents are looking towards retirement as their kids reach college age, so it does help ease the mind around retirement in that way. In any case, the new expansions from this bill will help some people reap more benefit from 529 savings plans.

Previously, the money in those savings accounts had to be used for college costs. However, the new bill changes that. For one thing, it allows the money to be used for homeschooling and apprenticeships. Perhaps even more powerfully, it allows the money to go towards paying off student loans. With student loan debt so incredibly high these days, that can mean a big change. Therefore, the Secure Act gives parents more reason to start setting aside money in those savings plans.

What’s Next for the Secure Act?

This act passed a critical committee in the House. It goes to the full House floor in May. The bill has a good chance of full Congress approval.

How the Secure Act Could Change Heir Rights