Change Concept, Road Sign theme.
The SECURE Act of 2019 has passed. This bill is the product of bipartisan effort, which should give thinking Americans a lead-in-the-gut realization about the sorry state of retirement preparedness and the importance of this issue. If the two sides of the aisle are working together, it might be important! The House presented SECURE, legislation, by its moniker, aimed at ‘Setting Every Community Up for Retirement Enhancement.’ The Senate produced RESA with largely the same goals, but slightly different provisions. Each of the respective legislative offerings are an attempt to help the average American prepare for their golden years. Our fathers’ generation would never have believed that pension systems might fail or that Social Security may not be available for them. The onus is on individuals to ‘peek around the corner’ of their own lives and make plans to finance their retirement.
SECURE contains 29 separate provisions, but here are five that are relevant, timely, and likely to change the way we navigate financial planning and estate planning.
1. SECURE changes the age of initiation for RMDs from 70 ½ to 72. This is a huge benefit. Under prior legislation, Required Minimum Distributions began at age 70 ½, which, over time, decreased the balance of the associated IRA because the math of reducing life expectancy (as you get older, your life expectancy, the denominator, unfortunately gets smaller). Increasing the age at which distributions are required allows additional time for the IRA to grow untouched. Compounded interest, anyone? With Americans remaining in the workforce longer, this provision might prove especially beneficial.
2. SECURE allows contributions to traditional IRAs after age 70 ½. This particular benefit is closely linked to the one in the previous paragraph. We’ve been given a bit of extra leeway in choosing the age at which to begin taking withdrawals from our IRAs, allowing extra time for that balance to grow. The age at which we must stop contributing to our IRAs has been increased allowing individuals working into their later years the opportunity to increase, or catch up with, their retirement savings goals. Consider this example: Sterling is a salesman, he and his wife, Ruth, have been using their IRAs to save for retirement. They have a contributory IRA that is worth $400,000. Under the old rules, Sterling’s RMDs would begin at age 70 ½, taking the minimum distribution, assuming he earns 7%, his RMD would be $14,599. Withdrawing at under the RMD rules, the balance of his IRA would never eclipse $552,030.80. Now, allowing for the SECURE provisions, Sterling continues to work until age 72, Sterling and Ruth both continue to max out their IRA, and delay distributions until age 72. His starting IRA balance, again assuming 7% growth, at age 72 is now $489,883.70 and provides a substantial increase in their retirement income.
3. Here are the warm, fuzzy provisions. SECURE allows for expanded benefits for part-time employees, debt-ridden students and new parents. These are areas in which the United States is viewed as lagging in providing benefits. Long-term part-time employees may now be eligible for employer qualified plans like 401(k) plans. With gig-based and contract employment arrangements on the rise, this measure will greatly enhance the numbers of workers who can engage in retirement savings through their employer.
Along the same lines, SECURE makes provision for a withdrawal of up to $10,000 from §529 plans to repay student loans. This is significant, both for the students who will incur less interest by paying the debt off more quickly, and for the economy as beleaguered graduates fight to repay loans while working and raising families. The student debt crisis is a mounting issue which some say could hobble the U.S. economy if left unchecked. Jana Steele, in a blog for Callan, writes “A quarter of Americans have student loans, and the U.S. student debt burden grew to $1.5 trillion in 2018. This issue impacts new employees entering the workforce, career workers, and parents who have borrowed to finance their children’s education. As financial wellness becomes a common theme in employee benefits, and as employers look to manage workforce retirement planning, managing student loan debt has become an increasingly significant concern for many employers.” This, along with PLR 201833012, are steps in the right direction in beginning to address the student debt crisis.
New parents, through birth or adoption will be eligible to withdraw $5,000 penalty-free to offset the cost of qualified delivery or adoption expenses. While it’s not paid maternity/paternity leave, let’s not discount a step in the right direction for healthy families.
4. Like a blind date with a shady past, here’s the not-so-pretty part: In most instances, SECURE eliminates ‘Stretch’ IRAs and now mandates inherited IRAs with non-spouse beneficiaries (kids or grandkids) must be withdrawn within 10 years. In times past, Spouse A could leave their IRA to surviving Spouse B, who would roll over Spouse A’s IRA, producing a larger combined account. When Spouse B dies, they could leave the balance to the couple’s children or grandchildren who could take distribution over their anticipated life expectancies, in effect ‘stretching’ the IRA. This minimized the impact of the income on the tax obligation of the beneficiary, providing stable streams of income that did not move them into a much higher tax bracket. These rules are now gone. Except in cases of a spouse, minor beneficiary, a chronically ill beneficiary, beneficiaries with special needs, or a beneficiary within 10 years of age of the owner of the IRA; the balance of inherited IRAs must be disbursed within ten years of the death of the second spouse. On the whole, this will cause much larger distributions during peak earning years, which will have a significant impact on the tax obligation. While not a tax increase, per se, it’s being called a ‘tax acceleration.’ No matter the moniker, it’s a revenue producing provision, and the beneficiary will be the U.S. government, to the tune of at least $15 billion in the first decade.
5. Who does this affect? The short answer is: A whole lot of people. First, realize this affects all qualified plans, so §401(k), 403(b), 457(b), 401(a), ESOPs, Cash Balance plans, lump sums from defined benefit plans and IRAs, which are the recipient vehicles of most of those plans as rollovers. Is it big? In 2017, the total assets of traditional IRAs topped 7.85 trillion. If the balance of your IRA is <$100,000, the consequence will be minimal and unlikely to affect adversely. If your IRA is between $100,000 and $400,000, the affect may be significant given the ages, income and number of beneficiaries. If your IRA tops $400,000, SECURE might be consequential. A review of your financial and estate plans as well as a conversation with your financial professional should be considered.
We’ve arrived at the point of application: SECURE has some great points and will be helpful overall in paving the way, not just for conversations about, but for practical retirement planning for many Americans. It will also make certain aspects, especially for committed, or ‘super savers,’ vastly more complex. This is no time for panic, but it is time for a conversation. Planning professionals can assist with pre-mortem vs. post-mortem planning, pre-tax vs. post-tax contributions and tax considerations. Be ready to see and hear a lot more about Roth IRAs and conversions. Think about revising your estate plan. Talk to your financial professional, be prepared to explore alternative methods for estate planning and retirement savings.