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What changes does the Secure Act bring? How might physicians be affected?

At the end of 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) act was signed into law, bringing in new changes and adaptations with regards to retirement savings. 

On the whole, the changes are positive. The bill appears to acknowledge that we’re all living a little longer, incentivizing businesses to provide savings plans to a wider range of employees, and allowing a longer time period for contributions. However, there are fears that the change could hurt beneficiaries, as traditional stretch IRAs have been eliminated. 

Let’s take a deeper look at the key points in the bill and how it might affect physicians. 

The SECURE act makes long-term part-time employees eligible for 401(k) plans.

Historically, part-timers who worked less than 1000 hours a year, weren’t able to contribute to a 401(K) plan. Now the law states that any company with a 401(K) plan must offer one to any employee who has worked 1000 hours or more in one year or 500 hours over 3 consecutive years. The only exception to this rule being plans that are part of a collective bargaining agreement.

Required Minimum Distributions will now start at 72 instead of 70.5.

The Act raises the required minimum withdrawal (RMD) age from 70.5 to 72, meaning that your savings will remain in a tax-protected account that little bit longer. It’s not required that you wait until you’re 72, but the option is there. This will be advantageous to some, especially to physicians who may want to take another year or two to Roth conversions. But the best withdrawal strategy will depend on your financial situation.

Note: If you turned 70.5 years old in 2019, you will still need to withdraw your required minimum distributions this year, and failure to do so will result in a penalty.

The age limit for IRA contributions has been removed.

Along with the adapted age limit for distributions, contributions to an IRA are no longer capped at 70.5. The chance to contribute indefinitely will come as a welcome change to those who are continually working beyond the traditional ‘retirement age’, as many Americans are. The caveat is you must still be working to take advantage of it.

Distributions to non-spouse beneficiaries must be made within 10 years.

Up until the SECURE act was passed, a non-spouse IRA beneficiary could stretch their inherited RMDs over their lifetime, potentially allowing them to grow tax-free. This rule has now been eliminated, and to replace it, law states distributions must be made within 10 years. 

There are exceptions to the rule for spouses, disabled individuals and individuals 10 years or younger than the account owner. If you’re already the beneficiary of a stretch IRA, this doesn’t affect you. These changes will apply to distributions inherited after the death of a non-spouse at the end of 2019. 

This ruling has the potential to hit physicians with large pre-tax accounts the hardest, as it also includes inherited funds in a 401(k) account and other defined contribution plans.

There are still options for non-spouse beneficiaries.

- The money can go into a Retirement Trust Account so that the beneficiary gets the money as dictated by the trust

You can, in essence, make a Retirement Trust Account the beneficiary of your IRA, and have the trust account receive the distributions over 10 years. This means that the non-spouse beneficiary will only be able to access the funds as per the Trustee or trust document states. Basically what you’re doing is making sure the money can only be accessed when needed, and when the beneficiary is old enough to make a decision about the money.

Before assuming the worst, ask for advice.

Overall, the SECURE act is a positive change for society, providing a better outlook for many who have been overlooked with regards to workplace retirement funds. For many savers, the bill may not have a huge impact. For physicians, the biggest adaptation will be redirecting distributions for non-spouse beneficiaries. 

Before seeing this as a negative, get in touch to talk about your specific financial situation. As we covered above, there may be an alternative that is more beneficial to you.