How the Secure Act 2.0 Affects Annuities
The Secure Act 2.0 – officially designated the Enhancing American Retirement Now Act – was passed at the end of last year. Its provisions build on the 2019 SECURE Act, further expanding retirement savings and spending options for the current generation of American retirees.
Though the new legislation contains few reforms specific to annuities, some of its measures are relevant to annuity holders and are either effective immediately or will go into effect later this year.
- Delays Required Beginning Date
More and more people are delaying their retirement. As of January 2021, the labor force participation rate for Americans age 65 and older was 19% – up 6% from where it was twenty years ago.
Whether out of financial necessity or an unwillingness to leave the workforce, more and more Americans in their early 70s find themselves forced to start withdrawing from their retirement accounts while they’re still generating income.
To accommodate this trend, the new legislation pushes the required beginning date (RBD) for taking required minimum distributions (RMDs) to the following April 1st after the account holder turns 73. Legislators expect to extend the RBD again in 2033.
- Allows Cost of Living Adjustments for Life Annuities
The measure also adjusts the treatment of life annuities. Contracts featuring cost of living adjustments (COLAs) – in other words, increasing payments of under 5% – now satisfy the rules for minimum distribution, making annuities with a modest but steady income stream a more attractive option.
- Adjusts QLAC Limit for Inflation
One of the Secure Act 2.0’s most notable changes is that it removes the 25% limit on lifetime income generated by QLACs (qualifying longevity annuity contracts). In addition, the maximum limit a retiree can spend on a QLAC using their retirement money has been raised from $125,000 to $200,000. The limit will be adjusted for inflation every year going forward.
QLACs are a great way for healthy individuals and people who want to keep working through their 70s to invest in annuities without having to take RMDs until much later than a typical contract. The RBD for a QLAC is the date of the contract holder’s 85th birthday.
This adjustment renders QLACs more accessible and easier for retirees to invest in, making it a good idea for anyone with a traditional qualified account to consider whether adding a QLAC might be beneficial.
- Reduces Penalties for Missing Distributions
Missing RMDs used to incur a hefty punishment – a total of 50% of the required distribution would be paid in the form of an excise tax. The new legislation cuts this penalty in half to 25%, lessening the burden on retirees.
Furthermore, if the missed RMD is corrected promptly and with proper documentation, the excise tax is reduced to just 10%. Lowering the fees, taxes, and penalties many retirement planners associate with annuities is sure to make these contracts a more attractive option going forward.
- Adds COLAs for Qualified Charitable Distributions
Qualified charitable distributions (QCDs) can be an excellent option for people in their 70s who aren’t ready to retire or don’t need access to the income provided by their required minimum distributions by or in the years immediately following their RBD.
Through a QCD, account holders aged 70½ or older can donate up to $100,000 each year from their taxable accounts to one or more charitable organizations rather than taking RMDs.
Section 307 of the Secure Act 2.0 adds a cost of living adjustment to QCDs and allows them to be indexed for inflation.
Secure Act 2.0: Final Thoughts
The Enhancing American Retirement Now Act contains several measures in addition to the ones laid out above. Many of these won’t go into effect until later this year, and most of them focus on other retirement vehicles such as 401(k)s, Roth IRAs, and traditional IRAs.
Still, the costs of living and inflation adjustments outlined in the legislation significantly impact many annuity contracts’ flexibility, giving Americans more leeway to save for their retirements on their terms rather than adhering to a set schedule that may not work for them.
Talk to a certified financial adviser about these changes to learn how your individual retirement plan may be affected and the ways in which taking advantage of these new provisions may benefit you.
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