Folks, I find that many Americans are facing a serious financial crisis in retirement. Last week, I was reading a recent report issued
Despite this and other dire warnings, gridlock on the retirement security of Americans has been the standard operating procedure for years on Capitol Hill – just like everything else. In fact, the “Washington Wizards” in Congress have done nothing to help Americans save more for retirement since 2006. That’s when President George W. Bush signed the Pension Protection Act into law, making it possible for employers to enroll employees in their retirement savings plans automatically.
However, things took a major step forward in May, with the passage of the SECURE Act in the House of Representatives, which passed with near-unanimous support. The fact that legislators on both sides of the aisle supported it shows that even the “Wizards in Washington” know they have to do something! Now the SECURE Act is being reconciled in the Senate with a similar bill called RESA.
So, with our time together this week, let’s have a look at the significant changes to retirement savings proposed by the SECURE Act and what they will mean for your retirement. There are a lot of provisions in the bill aimed at making it easier to save for retirement. There’s also a curveball that may fundamentally alter estate and legacy planning for many families.
So, let’s start with the fundamentals.
SECURE is an acronym that stands for “Setting Every Community Up for Retirement Enhancement.” Word salad aside, more than two dozen provisions in the SECURE Act are aimed at employees and workers alike. The goal is to help people save more, help more people get enrolled in retirement programs, and make it easier for more businesses to offer their employees retirement savings plans.
Today, individuals with Traditional, SEP and SIMPLE IRAs are required to take Required Minimum Distributions (RMDs) from their retirement accounts once they reach age 70 ½. The SECURE Act raises that to age 72. This would give another 18 months to accrue interest and earnings before you have to take distributions. The Senate’s RESA bill sets the RMD age even higher, to 75.
The maximum age for Traditional IRA contributions is 70 ½; Roth’s do not have a maximum age. The sponsors of the bill acknowledge that with more of us living longer and working later in life, this limit may be counterproductive when it comes to helping Americans save for retirement. It repeals the age limitation for IRA contributions altogether, so you can continue to contribute to a Traditional IRA if you’re working in your 70s.
Most Americans in the private sector work for a company that is considered a “small business” – that is, a business with a total headcount of 100 or less. The Census Bureau reports that small businesses are responsible for 50.2 percent of private sector payrolls in the United States. Several of the provisions of the SECURE Act
The bill helps offset the cost of setting up a retirement plan by increasing tax credits offered to businesses to create plans, with more tax credits for up to three years to small business owners who adopt automatic new hire enrollment. The ceiling for automatic 401(k) plan employee contributions would rise from 10% to 15%. Many part-time workers would also be eligible for enrollment in their employer’s retirement savings plans.
Retirement savings plans can be very costly for businesses, between administrative fees and regulatory compliance. Legislators hope that by lowering the cost of entry, more small businesses will offer their employees retirement savings plans. A provision in the SECURE Act seeks to address this by allowing “open” Multi-Employer Plans (MEP).
MEPs help businesses pool and share those expensive responsibilities, but the law currently says employers must share an organizational relationship. This is what’s known as a “closed” MEP. The SECURE Act would extend this ability to businesses that share no common relationships, thus allowing the existence of open MEPs.
The SECURE Act may also provide new ways for you to have reliable income streams throughout retirement by making it easier for retirement savings plan sponsors to offer annuities as part of their 401(k) offerings. It’s uncommon to see annuities in 401(k) plans right now – fewer than 10% do, according to the Society for Human Resource Management. The legislation creates a safe harbor which employers can use when selecting a group annuity as an investment within a retirement savings plan.
The SECURE Act did throw a curveball when it comes to estate and legacy planning. That’s because one provision would do away with so-called “Stretch” IRAs. Stretch IRAs aren’t a special kind of IRA. Instead, stretching is an advance tax and legacy strategy which extends the tax-deferred status of an IRA – specifically one inherited by a non-spouse beneficiary. Under the current law, the recipient must only take RMDs on an inherited IRA based on their life expectancy. That could leave an inherited IRA with decades of further growth ahead of it. The SECURE Act would require most beneficiaries to distribute their inherited IRA over ten years.
The Senate’s RESA bill mirrors many provisions in the SECURE Act, but there are significant differences, including the increase in age for RMDs and the part-time worker requirement. The SECURE Act underscores a more fundamental issue which should be paramount: That Congress isn’t going to come to anyone’s rescue when it comes to retirement.
This bill may make it easier for millions of Americans to save for retirement. It may greatly expand the number of American businesses that offer retirement savings plans to their employees. But it’s still up to each one of us individually to make sure we have a sound retirement strategy in place. One that we control.
Some of the SECURE Act’s provisions – such as the Stretch IRA changes – also may require some adjustments or rethinking when it comes to estate and legacy planning.
Folks, what is your strategy? What is your retirement system? Make sure to seek independent financial solutions from a qualified retirement specialist. They can guide you through these changes as Congress finishes the bill and puts it on the President’s desk for a signature before the end of the year.
Be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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