How the SECURE Act Weakens 401(k) Protections (& What You Can Do)

It’s hard to deny that one in five Americans not having put a single cent towards retirement is a social problem. But the policy solution Congress is enacting to address this issue may affect your 401(k).

As investors, we love the 401(k), the 1978 amendment in the Tax Code that quickly became one of America’s favorite retirement savings vehicles. But Congress is actively changing your 401(k)s legal protections. We’re not letting any of our readers get blindsided by changes in law. Unfortunately, the well-intended GOP bill with the stated goal of encouraging more Americans to save has real consequences that threaten all account holders.

Here’s what the folks in Washington are up to, and why some policy experts and scholars fear the 401(k) will be ultimately weakened and undermined by the SECURE Act.

Summer of Savings or Losses 2019? Congress’s SECURE Act Threatens 401(k) Protections

As of August 1, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House of Representatives. “Passed” is actually an understatement, given the bill flew through the House with a landslide 417-3 vote in favor of passage. We feel current projections anticipating a similar cruise through the Senate are likely accurate, and time will tell.

That said, keep in mind a bill can change substantially in the days, even hours, before its passage. Whether it’s amended in committee, filibustered, or provisions shuffle in and out at the last minute, there are many ways a bill can change in the moments before it becomes law. There is a distinct possibility that the bill at the time of this writing won’t be the exact version that passes, so confirm any effects you expect to personally impact your retirement plans.

Now’s a great time to remember that not every legislator reads or fully endorses every item in every bill they pass. Doing so takes hours of specialized time. So often, tucked within popular provisions are smaller edits and amendments that can actually make a massive impact if they become law. The changes to 401(k) protections are simply an example of this phenomenon.

For more information, see our article, How The SECURE Act Impacts Inherited IRAs.

Your IRA’s Not Safe Either: Certain Beneficiaries Can Kiss Stretch IRA Strategies Goodbye

The long-beloved stretch IRA is no longer a viable strategy for children of IRA beneficiaries. The  conventional estate planning and asset protection wisdom that has historically worked in these cases must change with the law. Even our attorneys used to recommend stretch IRAs for child beneficiaries, who are now excluded from stretching IRAs along with other non-spouse beneficiaries.

Fortunately, there are reasonable accommodations for certain situations, such as beneficiaries with chronic illnesses or disabilities or beneficiaries within 10 years of the decedent’s age, but otherwise, if you are the beneficiary of an IRA, you have to take your distributions within 10 years now. You no longer can rely on the stretch method to spread a large IRA over a lifetime, a tactic long used to preserve wealth within families.

Now, you have to use it within a decade or lose it.  

Update Your Estate Plan and Asset Protection Strategies to Account for New Changes

The best way to prevent any of SECURE’s possible negative effects in your own life is to plan around them. Keep eyes on the law, especially in its final form, and don’t be afraid to ask your own trusted professionals about possible impacts on either your asset protection strategy or estate plan. After all, the two are linked.

Given we can no longer fully endorse the same-old 401(k) asset protection advice, we encourage investors seeking alternative asset protection vehicles to consider forming a living trust to address estate planning needs. This flexible vehicle remains unaffected by these legislative changes.

Most Americans who participate in 401(k) plans will likely need to make some adjustments to their estate planning, and some may opt to change course in their retirement savings altogether. Whether changes will drive Americans away from the enduring 401(k) or legitimately promote access to retirement accounts is a policy question that only time will answer.

Last Updated: 
August 14, 2019

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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