What does the SECURE Act change and how does it affect you?
The Setting Every Community Up For Retirement Enhancement (SECURE) Act was signed into law this week.
This is the biggest reform related to retirement savings in over a decade, and it aims to address both the borderline savings crisis many aging Americans will face in the coming years as well as tweak some of the rules given our increased general life expectancy.
There are 29 separate provisions within the Act, but at the end of the day there are 3 primary goals:
Implement big changes to Required Minimum Distributions (RMDs).
Encourage small employers to offer retirement plans to their employees (who aren't already) and implement automatic enrollment.
Expand access to annuities within employer-sponsored retirement plans and improve portability of lifetime income benefits.
Like any new law, there are pro's and con's to everything. Generally speaking, we believe these changes are designed to positively impact mainstream America – those who are behind in saving for their retirement, continuing to work in some form into their 60's and 70's, and have no plan for how to provide steady cashflow or an income stream for their lifetimes. Our clients are not mainstream America. While there are some new planning opportunities opened up with this new law that we will address in our future Dashboard Planning conversations, on the whole we believe these changes are a "net negative" for our clients.
HOW WILL THEY DO IT?
> Increase RMD age to 72 from 70½ beginning 1/1/20
> Removal of IRA Contribution Age Limit
> Elimination of the "Stretch IRA" as it exists today
Beginning January 1, 2020, the SECURE Act will push back the age at which you need to start withdrawing money in the form of an RMD from your Traditional IRA retirement accounts to age 72 from age 70½. If you turn 70½ on or before 12/31/19, this change will not affect you, and you will still be required to begin taking RMDs. This change has been implemented in response to our increased life expectancy. To us, at Dashboard, this change likely means we will have an extra year or two to complete Roth conversions for some of our wonderful clients who would benefit from this strategy before their RMDs kick in!
The SECURE Act will eliminate the 70½ age limit for IRA contributions currently in place. Many Americans are working past the traditional retirement age of 65 or embarking on an encore "fun" career. This change allows them to continue to save money into their retirement accounts outside of an employer-sponsored retirement plan. Hopefully, this will allow workers who are behind in their retirement savings more time to "catch up".
The SECURE Act effectively eliminates the "Stretch IRA" estate planning strategy that allows IRA beneficiaries to stretch out required distributions from their inherited account – and any required tax payments – over the inheritor's lifetime. Under the new law, beneficiaries will be required to distribute the ENTIRE account balance and pay the applicable taxes within 10 years. Additionally, RMDs will no longer be required for inherited IRA accounts. Exceptions are made to these new rules, including spouses and chronically ill or disabled beneficiaries. This provision is not retroactive, and will not affect those who already have an inherited IRA or Roth IRA – it will apply to any assets inherited beginning January 1, 2020.
Increasing the RMD age and removing the IRA Contribution age limit are both positive changes, in our opinion, as they may create additional planning opportunities we can aim to take advantage of.
The elimination of the "Stretch IRA" is a big deal for many of our clients. It slams the proverbial door shut on one of our key generational planning strategies. As such, it will be critical to perform a comprehensive beneficiary review of all accounts to adjust plans accordingly. In particular, trust language should be reviewed ASAP to verify effectiveness and viability of the trust provisions under this new law.
We are noodling on what new awesome Dashboard Planning strategies we will help implement for our clients given these changes. It's likely we will challenge clients to consider "inter vivos" gifting strategies (like the 5 Year or 10 Year Challenge) to better control taxation of these dollars. More to come from us on this soon!
HOW WILL THEY DO IT?
> Increase access to Multi-Employer Plans (MEPs)
> Tax credit for business to start a retirement plan
> Tax credit for business using automatic enrollment
Multi-Employer Plans (MEPs) have been around for a while, although have not been super successful mainly, in our opinion, because of the rules and restrictions built in. With the SECURE Act, however, we will see a softening of these restrictions to make it easier for small employers to band together to offer a retirement plan to their employees. Previously, participating companies had to be "similar", typically within the same industry. Going forward any combination of small businesses can join together to achieve economies of scale, which should help decrease the cost of the plan both to the sponsor as well as to the participants.
We think it's great to provide small to mid-sized companies an incentive to not only offer a retirement plan to their employees, but also to automatically include their employees in the plan with a preset contribution rate by default as soon as they are eligible to participate. Many of these companies have never offered a retirement plan to their employees before, likely due to the costs and complexity involved, which certainly doesn't help with the potential retirement savings crisis our country is facing. Opening up new plans and requiring employees to proactively opt-out of them should hopefully boost overall participation and savings into the plan.
Another aspect of the SECURE Act is that employers will be required to expand access to retirement plans to part-time employees who work at least 500 hours per year for three consecutive years, or 1,000 hours for one year. This means even more workers will have access to a retirement plan, which is certainly a positive side effect.
These are all good changes that should make it simpler and more cost effective for small to mid-sized companies to offer retirement plans to their employees and encourage participation and increased retirement savings.
HOW WILL THEY DO IT?
> Grant "Safe Harbor" to employers when including annuities in retirement plans
> Allow for increased portability of annuities within the plan, avoiding surrender charges and fees
> Provide calculation of lifetime income benefit participant could receive based on account value
The "Safe Harbor" provision of the SECURE Act will effectively eliminate the employer's liability when including annuities in retirement plans – meaning if the insurance company becomes insolvent and can no longer honor its payments, the employer cannot be sued. We expect there may be "preapproved" insurance companies or products that can be included in plans to satisfy ERISA regulatory and fiduciary requirements of the plan sponsor, but that remains to be seen. Time will tell how this plays out, and whether there will be state or federal oversight on what insurance providers and products will be available within plans.
Previously, it was often difficult to transfer an annuity policy within your retirement plan to another plan (if you changed jobs) or to an IRA (if you left your job). Frequently, surrender charges and other fees would be triggered. Under the SECURE Act, participants should be able to avoid having to surrender (or cancel) the annuity policy and avoid additional charges as annuities within plans will be portable (or transferable). As a result, any associated Lifetime Income benefits will "follow" the participant. In general, this is a good thing for participants who chose to invest in an annuity product.
The SECURE Act will require plan administrators to provide annual "lifetime income disclosure statements" to all plan participants. These statements will show how much money the participant could expect each month if his/her entire retirement account balance were used to purchase an annuity. The rules around how this will be calculated have not yet been determined, but will likely be flushed out by the IRS and Department of Labor in the coming years.
The goal here is to provide clarity to the participants around how much they need to save in order to retire with a desired income or cashflow. That is a goal we, at Dashboard, certainly believe in and support. In our experience, many Americans are truly unaware of how much they need to save now on a regular basis to be able to support their desired lifestyle through retirement. Hopefully, this calculation will demonstrate the power of saving and investing over time, and encourage participants to save even more. However, despite these good intentions, it remains to be seen whether this calculation will actually provide helpful, meaningful insights to participants about how to save for their retirement or whether it will be just be an elaborate advertisement for an annuity product.
Frankly, these changes make us a bit nervous, as – to us – they seem to be a bigger win for the insurance companies than for the plan participants. Although annuities can be helpful in certain situations to provide a source of guaranteed income, they are often – in our opinion – complex, confusing, and expensive. Without a clear understanding of the specific product and associated costs and benefits, an annuity can potentially cause more harm than good for an investor in the long run. It will be critical to thoroughly evaluate available options before choosing to invest in one of these annuity products.
Converting a traditional IRA into a Roth IRA has tax implications. Additionally, each converted amount may be subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Any opinions are those of Dashboard Wealth Advisors, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.