The SECURE Act and You

Yesterday, Congress passed the SECURE Act— known as the Setting Every Community Up for Retirement Enhancement Act. 

Since you may hear about this Act as the “Biggest Retirement Bill in More than a Decade” and its “potential to change the retirement landscape”, we wanted to share our initial thoughts with you.

Overall, we believe this Act is a legislative victory for the “dark side” of the financial industry; likely the largest since the repeal of the 2017 Fiduciary Law. (As an aside – once the Fiduciary Law was repealed did you notice how most of the industry became fiduciaries overnight, regardless of their unchanged practices?)

We’ve been watching this bill wind its way through the legislative process for the last few years. Non-fiduciary product-providers and their salespeople have lobbied heavily for the Act’s passage. Not surprisingly, sellers of life insurance and annuities particularly stand to benefit. Congress also stands to benefit by increasing near-term tax revenues.

What do you need to know? 

1. First, try to ignore the media’s negative bias. Reality is often less severe.
2. Second, there are no changes for the remainder of 2019. Actions put in place based on past law should be maintained.
3. Third, we will continue to direct you appropriately with personalized and customized solutions. You’ve likely engaged us to watch out for issues like this. A great deal of thought goes into watching, learning, and interpreting how legislation affects your personal finances. 

In most cases, the thornier issues will not affect you during your lifetime. Your beneficiaries will bear the primary impact. Though a potentially distant impact, this has broad implications for the tax planning we do for you on a daily basis. 

What should you do now?

Although another layer of complexity has been added to your planning, the cure for the SECURE Act largely supports the actions we’ve already likely considered for you. 

We should continue to review your beneficiaries, effectively manage your tax bracket, and consider your potential for Roth conversions and charitable giving. 

You might consider taking the following additional actions:

• If you’re working and over 70 ½ you can now contribute to an IRA and a Roth IRA.

• After 2019, required distributions from IRAs and 401(k)s may be delayed from age 70 ½ to age 72. Existing Inherited IRAs are not affected by these changes. 

Interested in more detail? 

The law changes retirement account provisions, including:[1]

Inherited IRAs:

Goodbye, Stretch IRA

Beginning for deaths after December 31, 2019, the stretch IRA will be replaced with a ten year rule for the vast majority of beneficiaries. The rule will require accounts to be emptied by the end of the tenth year following the year of death. There will be no annual required distributions. Instead, the only required distributions on an inherited IRA would be the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules would remain in place.

There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over life expectancy. These include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than ten years younger than the IRA owner.

The new rules will mean a new landscape when it comes to retirement and estate planning.  How will they affect you? You may have some new opportunities to make IRA contributions or be able to access your retirement funds without penalty. You may be able to delay taking RMDs a little bit longer. Reviewing your beneficiary designation form is a good place to start.

Regular IRAs:

Age Limit Eliminated for Traditional IRA Contributions

Beginning in 2020, the new law eliminates the age limit for traditional IRA contributions (formerly 70 ½). Now, those who are still working can continue to contribute to a traditional IRA, regardless of their age.

Required Minimum Distribution (RMD) Age Raised to 72

The SECURE Act also raises the age for beginning required distributions to 72 for all retirement accounts subject to required distributions. IRA owners reaching age 70 ½ in 2020 catch a break and will not have to take their first required distribution next year now that the required distribution deadline has been extended to age 72.

New Exception to the Existing 10% Penalty for Early IRA Withdrawals

The SECURE Act adds a new penalty exception for birth or adoption, but the distribution is still subject to tax. It is limited to $5,000 over a lifetime. The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).

IRA Contributions with Fellowship and Stipend Payments

Additionally, the new law allows taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA (or Roth IRA) contribution.

401(k)s:

Employer Liability Protection for Annuities in Qualified Plans e.g. 401(k)s

The SECURE Act provides a safe harbor for employer liability protection for offering annuities in an employer plan. This is expected to open the door for more annuity products to be available as investment choices in employer plans.

Conclusion

Our goal remains unchanged – to continue to guide your finances based on your personal circumstances. Please be in touch any time we can answer questions, discuss your concerns, or otherwise be of assistance.