In 2020, retirement planning is expected to experience the first major shakeup since the Pension Protection Act of 2006. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was attached to a bipartisan spending bill which is expected to reach the President's desk later this week. If passed as proposed, it appears the bill does have dual objectives of increasing access to retirement plans for employees of small business and part-time workers while also generating additional tax revenue.  We will review some of the major implications for retirement savers and explain what you can do now to prepare should the bill get approved. For a complete summary of major provisions you can click here to review the information released by the House Ways and Means Committee.
Impact for Required Distributions & Planning Opportunities
Required Minimum Distributions Extended Past Age 70.5 to 72.
For those turning 70.5 after 2019, the bill would delay the date with which you are required to start taking withdrawals from qualified retirement accounts like IRA's, 401k's, 403B's etc. Under current law, you have up until April 1st of the year after you turn 70.5 to take your first distribution, so the bill would provide some tax relief for retirees in allowing them to delay these distributions for longer.
IRA's inherited by non-spouses can no longer be stretched indefinitely.
One tax planning technique that had been available to beneficiaries inheriting IRA's was to stretch these payments over their lifetime by correctly executing what is called a Stretch or Beneficiary IRA. After satisfying any distributions required for the deceased owner of the IRA, the beneficiary would need to begin taking minimum withdrawals based upon their life expectancy. For younger beneficiaries, this could allow an IRA to be stretched out for several decades based upon their longer life expectancy and lower mandated withdrawals. In addition to delaying the tax bill, funds could continue to grow on a tax-deferred basis over their lifetimes.
Under the proposed bill, non-spousal beneficiaries would be required to completely deplete inherited IRA accounts (and thus pay any income taxes due) over a 10 year period. This will make tax planning that much more important when you inherit an IRA as one will be forced to take larger taxable withdrawals over a shorter period of time.
It does seem that the Beneficiary IRA will continue to be an option for spouses. This is typically only utilized if the surviving spouse is expected to need access to funds from the IRA prior to age 59.5. It is unclear at this time if non-spouse beneficiaries that have already inherited IRA's and established a Stretch IRA will receive any grandfathering.
While this does seem to be potentially bad news for those with larger IRA balances that expect to leave money to their heirs, there are some potential planning opportunities that could offset the impact. Converting IRA accounts to Roth IRA's over time could prove to be even more beneficial. While a conversion on pre-tax dollars does result in income taxes due at the time of the conversion, it may reduce the amount a retiree is forced to take in Required Minimum Distributions after age 72. Using strategies to minimize required distributions can allow one to minimize and potentially eliminate taxes on their Social Security benefits. Another potential advantage is converting these pre-tax dollars into after tax Roth IRA dollars at a potentially lower tax rate than for those inheriting the funds. This could be a big win for your heirs but we recommend you consider your own needs first.
If one has named a trust as a beneficiary for a retirement account, it may be a good time to review this. This has been used as a mechanism to require beneficiaries to create Stretch IRA's per the language in the trust under what is called an IRA Legacy Trust. Obviously this would no longer be available and would conflict with the law post-SECURE Act. Reviewing beneficiaries and trust language is a good idea in light of this.
Impact for Pre-Retirees
Provide Incentives and Make it Easier for Businesses to Establish Retirement Plans
Perhaps one of the biggest benefits to come from the SECURE Act will be the expansion of access of employer retirement plans. In my experience as an advisor, saving into a company retirement plan typically ranks amongst the best financial decisions for clients. Making it easier and providing incentives for small businesses to offer these plans can only help the population become more prepared for retirement.
Automatic Contribution Increases Now Capped at 15%
One suggestion I often make for those not already maximizing their retirement savings is to utilize the automatic annual contribution increases that many employers offer. For example, if you are currently only saving 5% into your company retirement plan this feature enables you to increase this by 1% each year automatically. Previously this feature had been capped to 10% of compensation but the new bill would increase this percentage to 15% allowing pre-retirees to save more without much effort. In addition, small businesses would be eligible for tax incentives for certain types of plans (401k's and SIMPLE IRA's) that establish automatic enrollment for their employees.
No Age Maximum for IRA Contributions (Previously 70.5)
Considering many continue to work into their 70's and the potential for increasing longevity, it only makes sense to allow them to contribute to IRA's past age 70.5. Somewhat amazingly, those still working past age 70.5 had been able to save into Roth IRA's (assuming they met certain income requirements).
For those working longer and not eligible to contribute to Roth IRA's directly (due to income over $206,000 for Married Filing Jointly), making non-deductible IRA contributions and converting them to a Roth IRA tax-free may now be possible. We have already been using this strategy for highly compensated individuals but had previously been limited by the cap on IRA contributions at age 70.5.
What to do Now?
We have already been discussing the potential impact with clients during our review meetings since mid-summer as the legislation appeared likely to pass. With this set to become the law of the land in 2020, I highly encourage you to become more educated on how this will impact your family and review your plan. In addition, we will be covering this at our next Rejuvenate Your Retirement™ class being offered at UTC in January. Please let us know if you would like to receive an invitation to attend.
Visionary Horizons, LLC is a SEC Registered Investment Advisor located in Knoxville, Tennessee. Clients establish fee based accounts with a third party custodian, such as TD Ameritrade Institutional, a division of TD Ameritrade, Inc. ("TD Ameritrade). All custodian firms are independent and unaffiliated SEC-registered broker-dealers and members of the Financial Industry Regulatory Authority ("FINRA") and the Securities Investor Protection Corporation ("SIPC"). Firms offer us services which include custody of securities, trade execution, clearance, and settlement of transactions.
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Barron’s “The Secure Act Is About to Pass. Here Are 3 Ways It Will Change How You Save for Retirement.
House Ways & Means Committee THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (THE SECURE ACT)
Nerdwallet “2020 Roth IRA Income and Contribution Limits”