You may have missed the news – buried in a much bigger spending bill, and passed in the thick of the holiday season. But after months of nearly bringing it to the finish line, it’s now official: On Friday, December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.
The SECURE Act provides a mixed bag of incentives and obligations for retirement savers and service providers alike. Its intent is to make it easier for families to save more for retirement.
That said, “easier” doesn’t necessarily mean less complicated. As your fiduciary financial advisor, we’re glad we’re here for you! To jump-start the conversation, here is an overview of the most significant changes we’ve got our eye on, as the SECURE Act starts rolling out in 2020.
As you might expect, all the points below come with detailed exceptions and disclaimers that may influence how they apply to you. Before proceeding, please consult with us, as well as with other appropriate professionals, such as your accountant, and/or estate planning attorney.
Tax-Favorable Retirement Saving
Compared to previous generations, more Americans are living longer, remaining employed into their 70s, and shouldering more of the duty to fund their own retirement. As such, the SECURE Act includes several incentives to start saving sooner, and keep saving longer.
- Initial RMD increases to age 72 – Until now, you had to start taking Required Minimum Distribution (RMDs) out of your traditional IRA at age 70 ½. RMDs are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals remain unchanged. (My skeptical nature feels that this may be a pre-cursor to changing the ages of the Social Security payouts.) For our clients that we provide detailed financial modeling, we will update your projections with this change in law. This could change the asset location of the investments as well as create more planning opportunities. We will touch base with you as our financial modeling tool is updated.
- IRA contributions for as long as you’re employed – If you work past age 70 ½, you can now continue to contribute to either a Roth or a traditional IRA. Before, you could only contribute to a Roth IRA after age 70 ½. This was an odd result under the previous rules – Congress finally made this correction.
- Expanded participation for long-term, part-time employees – Even if you’re a part-time employee, you may now be able to participate in your employer’s 401(k) plan. To be an eligible part-time employee, one must have completed at least 500 hours of service each year for three consecutive years and must be age 21 or older. While this is a benefit for such part-time employees, it may impose a burden on certain businesses. Note, however, that these participants can be excluded from certain rules in the qualified plan arena, e.g., safe harbor contributions, nondiscrimination and top-heavy requirements.
- Expanded opportunities for graduate and post-doc students – If you are earning stipends and similar forms of income, you may now be able to count them as compensation for purposes of contributing to a traditional IRA.
Expanded 529 Plan Possibilities
Making it easier to pay off student debt is also expected to benefit your retirement saving efforts.
- Student loans –You and your kiddos can now use 529 college savings plan distributions to pay off up to $10,000 in student loans – per plan beneficiary and their siblings. For example, if you have one 529 plan account but two children, you can use that account to repay up to $10,000 of each child’s student loans ($20,000 total) out of the single account. Again, check the fine print; there are some procedural details and tax ramifications to be aware of. This could be a good option if you have otherwise paid for all of the schooling but have student loans remaining. You should evaluate the use of the 529 Plans in this manner compared to other uses.
- Apprenticeships – You can now use 529 plan distributions for expenses related to a qualified apprenticeship program.
Retirement Plan Restructuring
Even if you are not a business owner, it’s worth being aware that employers in general – and small businesses in particular – are being recruited to help employees save for retirement.
- Higher auto-enroll percentages – If your employer auto-enrolls you in their retirement plan, you are free to opt out. But most of us don’t bother. This usually works in your financial favor, compared to expecting you to sign up and increase contributions on your own. The SECURE Act now allows employers to continue to auto-enroll you in their plan, and automatically increase your contributions to up to 15% of your pay after the first year (versus a prior 10% cap). Again, you can proactively remove or change your contributions to whatever you’d like, but we often recommend contributing the maximum allowed.
- More MEPs – Until now, only businesses who shared a common interest were allowed to establish a multiple-employer plan (MEP). As described in this Kiplinger report, “Starting in 2021, the new law allows completely unrelated employers to participate in a [MEP] and have a ‘pooled plan provider’ administer it.” This means small businesses should now have more ways to offer more cost-effective retirement plans, with the savings passed on to employees who participate in the plan. At Oasis Wealth, we will be active in offering this to small businesses. If you or a small business you know needs to begin a retirement plan or potentially reduce the costs of their current retirement plan, let us know.
- Additional small-business incentives – The SECURE Act provides a few other tax breaks and credits to help small businesses open and operate employer-sponsored retirement plans for their employees.
An Estate Planning Limitation: Non-Spouse Stretch IRAs Mostly Go Away
So far, we’ve been covering the “carrots” meant to encourage retirement saving. There’s also an important “stick.” It’s presumably to offset the expected reduction in federal income tax collections, due to increasing the RMD age to 72. The SECURE Act eliminates the use of stretch IRAs for most non-spouse beneficiaries, which could impact your current or future estate planning. Boo!
To be clear, a stretch IRA is not a formal account type. It’s a practice that enabled you to bequeath your IRA assets to your heirs who could then keep the inherited account intact and tax-sheltered, essentially throughout their lifetime. With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within a decade after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.
This has several implications. First, your beneficiary designations in your retirement plans may need to be reviewed. Many individuals name their trust as contingent beneficiary of such retirement plans. While this may still be wise counsel for many, for others it can result in an income tax nightmare. It is important to review the distribution terms of the trust in light of your – and your beneficiaries’ – overall financial situation.
Another impact is the Traditional IRA v. Roth IRA equation. As most of you know, we are big fans of reviewing the relative benefits of those two options and do review the wisdom in converting a portion of Traditional IRAs to Roth IRAs in the right situation. While there are many factors that play into deciding whether or not to convert, the current versus future tax rates is one of the more important factors. This change in law may result in the beneficiaries being in a higher tax rate.
While it is obviously difficult to predict with precision when the beneficiary would inherit the retirement assts and what their tax rates would be at such time, it is not hard to imagine an individual passing away in their mid-80s when their adult children are in their late 50s to mid-60s – their peak earning years. If you add a larger distribution from a Traditional IRA with peak earnings, the tax consequences may not be favorable to the beneficiary. While our best advice is to generally spend your money during your lifetime (!), you may want to revisit the Traditional v. Roth question as well as the beneficiary structure of your retirement plans and IRAs.
Investment Management: An Annuity in Your Retirement Plan?
A number of articles in the SECURE Act are aimed at helping you not only save for retirement, but feel more confident you won’t run out of money once you get there. As such, the Act is making it easier for employers to add lifetime income annuities to their plans, as a distribution option for employee participants.
The SECURE Act also has established new reporting requirements for your employer. The new report is meant to make it easier for you to envision how much of a lifetime income stream you can expect, if you decide to annuitize your accumulated retirement plan assets. This reporting requirement does not take effect until a year after the Department of Labor has established a set of rules for your employer to follow when creating your report … which could take a while.
Bottom line, we applaud the overall idea of creating a secure retirement, but there are many ways to go about achieving it. If you are considering annuitizing some of your retirement assets today or in the future, we hope you’ll be in touch, so we can explore the possibilities with you in the context of your own circumstances.
There are quite a few other components to the SECURE Act. Some of them are aimed at managing access to your retirement savings for pre-retirement spending needs. For example, the SECURE Act now allows parents to withdraw up to $5,000 from their IRA without penalty (but with potential income taxes) for birth or adoption events. It also now prohibits plan providers from allowing participants to take out 401(k) plan loans using credit cards.
As you might expect, we prefer ensuring your financial plan budgets for upcoming spending needs, without having to tap into your retirement reserves. If it might not, let’s get together soon, and plan accordingly.
Planning for Your Secure Retirement
What can we expect moving forward? Not every component in the SECURE Act is effective immediately. Some may continue to come into sharper focus over time. As such, we may recommend some changes to your financial planning in the near future, while other steps may be required or desired over time.
This is to be expected, given the number of reforms enacted in this sweeping bill. Come what may, we look forward to being by your side throughout. As we embark into 2020 together, we will be connecting with you, to ensure that your retirement planning complies with and takes optimal advantage of the SECURE Act of 2019.