What the SECURE Act Means for Your Retirement
Christine Benz discusses some of the key aspects of the legislation, including IRAs, RMDs, and taxes.
Editor's Note: The video contains an error in Christine's first answer that has been corrected in this transcript to the correct year.
Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. The SECURE Act passed through the House this week, and it's also expected to be approved by the Senate. It was part of a broader spending bill. Joining me to discuss some of the key aspects of the legislation that are likely to have the biggest impact on retirement is Christine Benz. She's Morningstar's director of personal finance.
Christine, thank you for being here today.
Christine Benz: Susan, it's great to be here.
Dziubinski: This is a pretty important piece of legislation.
Benz: It is.
Dziubinski: So, let's talk about some of the various aspects of it, starting with the changes to required minimum distributions. Now, if you've taken your RMDs in 2019, does this change apply to you and what is the change?
Benz: It doesn't. So, unless you have turned 70.5 by the end of 2019, this won't affect you. But for people turning 70.5 in 2020 and beyond, they'll now have a new higher required beginning date for their required minimum distributions. So, it's moving out to 72. So, this is good from the standpoint of affluent retirees. I'm sure a lot of our viewers fall into that bucket where they don't need their IRAs or their traditional 401(k)s for their ongoing spending. They would rather push them off and enjoy the tax deferral and enjoy deferring the tax bill as far as they possibly can. So, I think that this is a good development for them.
I think it's also a good development in light of the fact that we've got more and more people working longer. And if you're pushing your retirement date out, there's often not much space between the time retirement starts and when you have to start taking RMDs. This gives you a little bit more of what Vanguard's Maria Bruno has called the “retirement sweet spot,” which is kind of a planning opportunity where your income may be at a relatively low ebb. You can do some things like maybe accelerate your withdrawals from those tax-deferred accounts. So, I think that there are some opportunities, especially for wealthier retirees who don't need their IRAs imminently in retirement.
Dziubinski: And there are also implications for what we call the “stretch IRA” in this legislation. So, can you step back a little bit and talk about what the stretch IRA is, and then what's changing.
Benz: Right. So, the stretch IRA is something that beneficiaries could take advantage of if they inherited an IRA or some other account from a loved one. The idea was that they could take their required minimum distributions based on their own life expectancy. So, for a very young inheritor, that would allow the opportunity to stretch over many years potentially. Now, under the SECURE Act, assuming it gets passed into law, what will happen is that the person who inherits an account will have to take the proceeds from that account within 10 years of inheriting it. It's not saying that you have to space it out, take equal distributions over 10 years or anything like that. You just have to take all of the amount out by the end of 10 years. So, this is a change. Again, it's going to have a bigger impact on wealthier folks who are in a better position to not tap those inherited assets, who could let the tax benefits stack up.
Dziubinski: Now, the SECURE Act also allows for additional contributions to Traditional IRAs after age 70.5.
Benz: Right. So, these were previously off-limits. And I think this is a good development in that, as I said, we have more and more people working longer. And so the idea of being able to make ongoing contributions makes a lot of sense. Another thing that makes this I think a good development is that it gives Traditional IRA contributions parity with other account types. Because previously, for example, you could still contribute to Roth IRAs, even if you were older than age 70.5. So, I think that this is overall a good development.
Dziubinski: Now, the SECURE Act has a provision that's going to make it easier for workers who work for smaller companies to get retirement plan coverage. Can you talk a little bit about what that means, what a multiple employer plan is, which is on the table?
Benz: Right. So, these multiple employer plans are plans that smaller employers would be able to create. They might be able to band together with other small employers to field a plan for their employees. So, overall, I think this is a really encouraging development because when you look at our system on a broad basis, one thing you see is that a lot of our population, a lot of working people, are not covered by any type of plan at all. So, this would make plans more pervasive, I think. It's a good thing. I will say though, in an ideal world, I would rather have seen some sort of – I still would rather see some sort of a federalized option, maybe similar to the Thrift Savings Plan, where you have a mega company retirement plan option, where it's vetted, where you can put some pressure on the providers to keep the costs down. I think there's just a little bit of inefficiency associated with having all of these different firms, even if they are banding together, field different plans.
Dziubinski: Another, maybe a little bit more controversial aspect of the SECURE Act is the idea it's going to be easier for company retirement plans to offer annuities.
Benz: That's right. So, companies are given safe harbor if they want to offer annuities. Essentially, that protects them from litigation if something happens with the insurance company offering the annuity. So, this has been seen as a big win for insurers. And I think it most certainly is. I will say there's a lot to be said for the very plain-vanilla immediate-type annuities. We've talked to a lot of retirement researchers over the years who have said that this is one of the best things that retirees can do to improve the viability of their plans. But it's an open question about the types of annuities that would be on offer within the context of plans. Some annuities are very high-cost, very opaque. They're not all good. So, I think that that's where things get a little bit murky. It has the potential to be a win for investors, but it really will come down to what type of annuity is chosen.
Dziubinski: It seems like with some of this, time will tell which are the wins for investors out of this. Christine, thank you so much for your time.
Benz: Thank you, Susan.
Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.