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The biggest downside to America's sweeping new retirement law

Joanna Campione
·Producer

The SECURE Act — which stands for Setting Every Community Up for Retirement Enhancement — went into effect on Jan. 1.

The goal of the new law is to boost retirement savings, in part by giving small businesses new incentives to provide retirement plans for employees. And of course anything that’s done to get more people saving for retirement is a win.

Americans are woefully behind on their retirement savings. According to a 2018 survey of nearly 6,000 U.S. workers from the Transamerica Center for Retirement Studies, just 24% plan to retire at that magic age of 65, while 54% of American either expect to continue working past 65 or don’t plan to retire at all. Only 22% say they will retire before age 65.

Michael Goodman, president of Wealthstream Advisors and a member of the American Institute of CPAs, says he likes a lot in the new law. There is one big downside, though.

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Prior to the SECURE Act, if a family member had an Individual Retirement Account, died, and left that IRA to a non-spouse heir, that beneficiary could make withdrawals over the course of their lifetime and continue to benefit from the IRA’s tax-deferred growth. This was known as a stretch IRA. Under the SECURE Act, beneficiaries have to take that out within 10 years.

Retirement may be far off for many Americans. Credit: Getty Images.
Retirement may be far off for many Americans. Credit: Getty Images.

“In the past ... if you received an IRA or a 401(k) as a beneficiary, you could take it out over your life expectancy,” Goodman explained. “And what does that really mean, is it means you're taking small pieces out over your life, also getting the tax deferral. So your money is being able to grow tax deferred within that plan, and then ultimately you're setting yourself up for a nice little retirement plan in the future. Now you're going to have to take that out within 10 years.”

He gave the example of a 40-year-old who has a 40-plus-year life expectancy. Before the SECURE Act, they could make withdrawals over the course of four decades. That person now has to withdraw those funds by the time they’re 50.

“So, there's a lot of planning opportunity there as to what's the best time to take that out,” Goodman said.

How Congress is making it easier to save for retirement

Still, Goodman pointed out many positive provisions in the law, including an auto-enrollment feature that gives employers a tax credit for putting a system in place to automatically enroll workers when they become eligible for a 401(k). That employee would have to opt out of the program to not save.

“Right now, there's no requirement to do either one,” Goodman said on Yahoo Finance’s On the Move this week. “I would say probably the vast majority of plans don't have auto-enrollment. And that's probably an area where maybe we could have gone a little further in the SECURE Act.”

Goodman contends auto-enrollment should be the law along with auto-increasing of retirement savings, meaning each year an employee’s contribution to a retirement plan increases by a set amount. Employees should be required to opt out of these features as opposed to having to opt in to saving, he says.

Aside from the auto-enrollment component, the SECURE Act also requires employers that offer retirement benefits to provide them to part-time workers once they’ve worked 500 hours each year for three years in a row. The law also changes the age for when IRA and 401(k) holders have to begin withdrawing from their account — it’s now age 72 instead of age 70.5.

What Goodman also likes about the SECURE Act is that it encourages employers to offer annuities as investment options within their 401(k) plans.

“It's a great feature for people [and gives them] the ability to, perhaps, take their retirement assets and convert it to an income stream, much like Social Security,” he said. “For most people, that's very comforting. It's a set income amount, you can't outlive it, it's going to go on forever.”

Joanna Campione is a producer with Yahoo Finance.

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