The SECURE Act of 2019

After months of deliberation and uncertainty, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) act on December 20th of last year. What was all the fuss about and what does it mean to you?

There are significant changes to the rules and restrictions on qualified retirement accounts and everyone should brush up on what those are as they will impact most of us.

Here are the highlights of the new law that affect individuals.

1. Non-spouse beneficiaries of an IRA will no longer be permitted to "stretch" distributions from that "inherited" IRA over their life expectancy. Instead, the entire balance of the account must be distributed within 10 years.

2. Required minimum distributions from IRAs and 401(k)s must begin by age 72, up from the previous requirement of age 70 1/2.

3. Plan sponsors (employers) can now offer guaranteed lifetime income options (annuities) within their qualified plan.

4. Individuals with earned income can now continue to contribute to a traditional IRA past age 70 1/2.

The most significant changes are the elimination of the "stretch" IRA and the inclusion of annuities in 401(k) plans.

If you expect to pass on a significant IRA balance to your children, the tax consequences of doing so should already have been a concern of yours since they were required to take annual distributions from the IRA and count it as income for tax purposes. Now it should be even more of a concern since the distributions (in most cases) must be condensed over 10 years instead of their life expectancy. This means larger distributions and likely a bigger tax hit lowering the value of their inheritance. There are strategies to overcome this that you should be considering. The one I like best (depending on your age and health) is using life insurance to offset the tax burden that you leave to your children along with the IRA.

If your employer now includes annuities as an option as part of your 401(k), you will need to discuss your options with a licensed life insurance specialist. Annuities are complex insurance products that need to be understood as they typically come with higher fees and surrender charges and you don't want to be negatively affected by them. The benefit is that they will provide you with income that you can't outlive, something your mutual funds can't guarantee. But there's no guarantee that you'll get all of your annuity value out either which is why it is of critical importance to understand how these vehicles work before investing in them.