Just when you thought you’d tied a big, red bow on your retirement plan, Congress passed the SECURE Act in the final weeks of December. SECURE (which stands for Setting Every Community Up for Retirement Enhancement) made quite a few headlines and, from my perspective, was oversold like sliced bread (it is certainly not the best thing since)!However, despite its obvious faults, it is possible to use the Act to your advantage. The key, as always, is smart planning.The issues with the SECURE Act include, first, that certain of its provisions are designed to generate taxes, which means a tax hike for many. Second, it’s no wonder the life insurance lobby spent millions working to push the Act through Congress; the SECURE Act is a bona fide boon for those companies who make their sales numbers by selling high-cost annuities into corporate retirement plans. While it will undoubtedly bring insurance companies new revenue, for the rest of us, it brings changes that require a renewed focus on multi-generational, multi-year planning.Here’s a quick look at three of the biggest changes that become effective on New Year’s Day and what they mean for your retirement plan:
1. Non-spouse beneficiaries can no longer ‘stretch’ distributions for Traditional and Roth IRAs.
Under the old law, non-spousal recipients of inherited IRAs were required to take Required Minimum Distributions (RMDs) from the account, but they were able to ‘stretch’ those distributions over decades (life expectancy) to help mitigate the tax impact. Under the new rules, most beneficiaries are required to deplete the inherited accounts by the end of the 10th year, and there are no RMDs prior to that date. (The rule does not apply to beneficiaries who are surviving spouses, disabled or chronically ill, minor children, or less than 10 years younger than the owner.) The planning impact: Multi-generational tax planning with IRAs used to be pretty simple. With the SECURE Act, that is no longer the case. That means that if you have large IRAs, it’s more important than ever to consider your heirs in the planning process. Imagine you leave a $1M IRA to your children and they wait until the 10th year to empty the account. The result will likely be a massive tax bill based on the full balance of the account. The smarter approach: your heirs should plan carefully to take strategic distributions from the account to minimize the total tax bill. Options to consider include ‘bunching’ of deductions (read more about bunching in my blog post here), taking strategic distributions to manage tax brackets, and more. (Here’s a plus to note: beneficiaries of current inherited IRAs who were in place before January 1, 2020 are excluded from the new restrictions.)
2. There is no longer an age limit on IRA contributions.
It’s a fact that more people are remaining in the workforce throughout their 60s, 70s, and even 80s. For this reason, the old law that prohibited contributions to IRAs after age 70½ was certainly outdated. (In fact, IRAs were the only type of retirement accounts with this restriction.) Under the SECURE Act, workers can now contribute to IRAs at any age. The Act also changed the start date for all RMDs to age 72—a move that greatly simplifies the old complications surrounding the age 70½ rule and allows older workers to save longer for retirement. The planning impact: Many existing retirement plans are built around a hard-stop on IRA contributions at 70½. With that restriction now a thing of the past, it’s important to review and rethink your contribution plan—especially if you continue to earn income in your 70s and beyond. Your RMDs may also be delayed, which will further alter your income strategy in retirement. As well, while we generally begin to start planning for RMDs at about age 60—a prime time to really manage tax brackets—that timeframe has now been extended by 1½ years thanks to the new start date for RMDs at age 72.
3. Retirement plans are now easier to create and maintain—but there’s a catch!
One of the good things about the SECURE Act is that it enables small businesses to create Multiple Employer Plans (MEPs) much more easily and with less risk. Under the old MEP rules, if just one employer in the group failed to adhere to the complex plan rules, the entire plan was disqualified and put all participants at risk. However (and here’s the big catch!), the SECURE Act also makes it MUCH easier to convert employer retirement plans into lifetime annuities to fund that monthly income amount. This could be a benefit to employers and employees IF it were restricted to low-cost, well-managed annuities. But, unfortunately, that may not be the case (the insurance lobby didn’t fight this fight for nothing, after all!). The Act also includes a provision that creates a new safe harbor for selecting an annuity provider—which means that if an annuity provider goes bankrupt, the plan fiduciaries are not held responsible. Buyer beware! The planning impact: Imagine you own a small car dealership. Due to the high costs and liabilities of creating a 401(k) plan, you might not have provided your employees with this great retirement savings tool. Under the SECURE Act, you and other like-minded business owners can now create an MEP to offer a 401(k) to your employees together. If you do choose to include an annuity (which can be a great tool to mitigate longevity), stick to lower cost products, and stay away from high-commission products that can put your whole plan—and your employees’ retirement savings—at risk.As you can imagine, there’s a whole lot more to the SECURE Act than what I’ve included here. Other provisions include allowing tax-free withdrawals of up to $10,000 from a 529 college savings plan to repay student loans (a great change indeed!); allowing new parents to use up to $5,000 of IRA assets to cover the costs of childbirth and adoption penalty-free (though the rules around this are a bit tricky); and there are some nice incentives to encourage employers to offer 401(k) plans and encourage employer participation. Clearly, it’s a mixed bag.I am not certain that the delay in the Required Minimum Distribution age was a great tradeoff for losing the ability to stretch distributions for the next generation. As a Certified Financial Planner™ (CFP®), I am also concerned that some features of the SECURE Act do not feel fiduciary minded. Despite the many concerns of the financial planning community—a group of professionals who are legally bound to always act in the best interest of our clients—the large and powerful insurance lobby was able to push the annuity provision in the SECURE Act through Congress. I see it as the job of advisors like our team at TandemGrowth to make sure our clients avoid the pitfalls of the SECURE Act while reaping its benefits.If you are committed to creating a truly ‘secure’ retirement, the best approach moving forward is to talk to your fiduciary advisor as soon as possible. Now is the time for us to work together to determine how the SECURE Act impacts your existing plan and to create a multi-year, multi-generational plan that uses the new law to your advantage.