How the Secure Act affects IRA, 401(k) plan holders and beneficiaries

The Secure Act, which passed and took effect Dec. 20, 2019, became applicable at the start of this year. The federal law made changes to a number of retirement vehicles, which means many people and businesses should take time to consider how the legislation affects them and their beneficiaries, and make adjustments.

“It’s been viewed by many as a patch, but it’s a significant change to the way IRAs are treated, and there are implications for 401(k) sponsors that shouldn’t be overlooked,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “The Secure Act is in place, so it’s important for account holders and sponsors to plan for its more significant changes, especially those that affect beneficiaries.”

Smart Business spoke with Altman about the Secure Act, some of the key changes it brings to IRA and 401(k) plans, and what those changes mean for account holders, their beneficiaries, and employer sponsors.

What changes to IRAs and 401(k)s are important to highlight?

The Secure Act makes a few changes that will largely benefit IRA holders. For example, the minimum distribution age for IRAs has been changed from 70.5 to 72. That, for many people, can represent a meaningful difference, as it allows for the money within an IRA to enjoy additional tax-free growth.

The law raises the age of restriction on making contributions to an IRA. Previously, IRA contributions were prohibited after the account holder reached the age of 70.5. Now contributions can continue as long as the account holder is working.

However, the law changes the rules that dictate the time by which funds in an IRA must be removed by a beneficiary after the death of the account holder. Currently the named beneficiary may take funds out of an IRA over their life expectancy. Now funds must be removed within 10 years of the original account holder’s passing.

How might the law change affect employers?

The Secure Act’s passage also brings new rules regarding who can participate in 401(k)s that are favorable for account holders and mixed for plan sponsors. One notable change is that the law allows more part-time employees who qualify under testing rules to participate in a 401(k). This is where business owners should examine their plans because there now might be part-timers who either need to be covered or want to participate. Those who employ a lot of part-timers might end up contributing more to their 401(k) plans if participation increases. While that’s an additional cost, it could help employers improve retention.

What have been some of the early questions or concerns regarding the changes?

One of the issues that’s arisen from the changes is how best to deal with second marriage situations. Some of those who hold IRAs want to make sure their current spouse is taken care of, but when that spouse passes they want the money to go to the children of the first marriage. The new rules makes that more difficult.

Taking money out of a traditional IRA means paying ordinary income tax on the amount withdrawn. However, by converting to a Roth IRA, when the money eventually goes to the designated beneficiaries, they won’t pay taxes on the withdrawals because Roth dollars are tax free.

More generally, however, most people want to understand how their beneficiary designations will work under the rule changes. That’s something that’s important to take the time to look at. IRA holders should talk with their with legal, tax, banking and financial advisers to determine a structure that makes the most sense for their situation.

The IRA and 401(k) changes brought on by the Secure Act will apply to lots of people because so many in the U.S. have assets inside an IRA or 401(k), or sponsor a 401(k) plan for their employees. These are broad-reaching changes with significant impact, so it’s important not to gloss over the issue. Talk with trusted advisers and ask good questions to determine how this affects retirement outcomes not only for the current holder, but also for their beneficiaries.

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