The most significant retirement legislation since the Pension Protection Act of 2006 may affect younger generations more than retired seniors – and not in a good way, according to one retirement expert.
That’s because the SECURE Act eliminates the so-called “stretch IRA” that allowed those who inherited IRAs to enjoy tax-deferred growth for decades.
“The biggest effect will be, not on the retirees, but on their beneficiaries,” said Ed Slott, founder of IRA educational firm Ed Slott and Co., in a recent appearance on Yahoo Finance’s The Final Round.
The legislation was signed into law earlier this month by President Donald Trump.
Bye-bye stretch IRA
Before the act, non-spouse beneficiaries who inherited IRAs had to take required minimum distributions, or RMDs, based on their life expectancy. An RMD is the annual amount you must withdraw from your IRA account.
If the beneficiary of the inherited IRA is young, then the RMD amounts would be small, allowing the remaining funds to grow tax-deferred during the beneficiary’s life.
“If you named a beneficiary, say a young child or grandchild, they could stretch distributions over their lifetime – 50, 60, 80 years even, in some cases,” Slott said. “So lots of people with IRAs and 401(k)s took advantage of that by naming younger beneficiaries.”
But the SECURE Act stipulates that a non-spouse beneficiary must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. That means less time for the funds remaining in the account to grow tax-deferred.
“For those people that want to leave more to their children, they may be better off looking at Roth IRAs,” Slott said. “[Or] maybe a series of smaller annual conversions over many years.”
Other key changes
The act also changed when you must take RMDs. Before, you had to start taking these withdrawals when you turned 70 ½. Now that age limit is 72.
You can also continue to contribute to traditional IRAs regardless of age. Before, you couldn’t contribute after you reached 70 ½.
The SECURE Act also makes it easier for companies to include annuities in retirement plans. Annuities are contracts in which you pay premiums to an insurance company in exchange for future fixed income payments. They’re designed for those who could run out of money in retirement.
“People need lifetime income,” said Slott, who likes the change.
Still, other experts worry that annuities could be too confusing and pricey for the everyday person to include in their retirement planning.
“Annuities are incredibly complex and they come with loaded upfront costs,” Kevin Busque, CEO of Guideline Inc., a small business 401(k) and IRA provider, told Yahoo Money in a telephone interview. “They will be sold by financial advisors who may not have your best interests in mind.”
Dhara is a writer for Yahoo Finance. Follow her on Twitter @dsinghx.