I have tried over the years to teach my kids simple life lessons. Lessons such as, “Kids, there are no short cuts in life.” Or, “The road to success only comes through the desire to be successful, the determination to find a way to achieve success, and the dedication to see it through.” Or how about, “If plan A does not work out for you, kiddo, there are 25 other letters in the alphabet.” If you want a good teenage eyeroll use, “All change is hard, but all change creates opportunity. Now go find it!”
Well, the Washington Wizards in Congress have made significant changes to how we prepare and save for retirement with the bipartisan support and passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. And I did say bipartisan; these days compromise is a dirty word.
So, while all change may be hard, this week let’s see if we can find some opportunity.
The SECURE Act, which was included in the most recent government spending bill, includes a number of provisions designed to strengthen retirement security across the country. While the new law isn’t perfect, it does offer Americans additional opportunities to save enough for a comfortable retirement.
This law was enacted out of a desire to help investors better plan for a sustainable retirement. With life expectancy increasing and our social systems–such as Social Security and Medicare–being stretched thin, consumers need to be better prepared to fund a greater portion of their own retirement. Most of the key provisions of the bill are geared at just that.
First is an increase in the Required Minimum Distribution (RMD) and contribution ages. Previously, the law of the land required us to take RMDs from your qualified retirement accounts, such as an IRA or 401(k), each year once you reach age 70-1/2 and each year thereafter. Failing to take this required withdrawal each year will likely result in a penalty of 50% of the amount you should have withdrawn but didn’t. The SECURE Act increases that age to 72. While this isn’t a significant change, it does give savers an extra 18 months to delay paying taxes on that money, which is especially beneficial if you don’t yet need these funds for income.
Compounding this benefit, the bill also eliminates the maximum age for traditional IRA contributions, which was also previously capped at age 70 1/2. So, not only can you delay taking withdrawals during these 18 months, you can even continue to add to your retirement savings at the same time. Together, these changes should help to give your retirement savings a nice boost. However, if you turned age 70 1/2 in 2019 or earlier, you still need to take your RMD for 2019 or face the 50% penalty. If you will turn age in 70 1/2 in 2020, you do not need to take your RMD until age 72.
Another significant benefit is the ability for consumers to purchase an annuity as an investment option within a 401(k) plan. You see, the Employee Retirement Income Security Act of 1974, or “ERISA,” was enacted to provide protections for those enrolled in company retirement plans. Under ERISA, the employer has a fiduciary responsibility to ensure any investments available within the plan are appropriate for employees’ portfolios. This has made it difficult for employers to include annuities as an option within the 401k, because they can’t necessarily vouch for the individual suitability of an annuity purchase. However, under the new rules, the responsibility now falls on insurance companies (which sell annuities) to offer proper investment choices and make the suitability determination.
This is a tremendous opportunity because unlike other retirement vehicles, annuities guarantee savers that their money is protected from market loss and offer a guaranteed income stream over their lifetime, so you never run out of money. Remember, a sound retirement system not only has to get you to retirement, but it also has to get you through retirement. These types of guarantees have been lacking in the 401(k) plan – guarantees that retirees are looking for to supplement their Social Security payments and help meet basic expenses in retirement.
Folks, make sure to reach out to a qualified retirement specialist who can help you understand the appropriateness of an annuity, why they may be helpful to your system, expense ratios, and the financial strength of the insurance company. And only if appropriate, the annuity is usually selected for a portion of your assets, not all of them, so that you can maintain an appropriate level of liquidity and growth potential in your portfolio.
The SECURE Act also provides greater opportunities for small businesses to offer retirement plans to their employees through the Multiple Employer Plans (MEPs). MEPs are intended to encourage employers to offer a work-based retirement plan by reducing the administrative burden and fiduciary responsibilities of operating a plan. In the past, some small companies avoided participating in a MEP because of the so-called “one bad apple” rule that stated if one employer did not meet the plan requirements, the plan would fail for all others involved. As part of the Secure, act, unrelated companies can now pool together to offer employees a retirement plan.
Employer-sponsored retirement plans are now also available to long-term part-time workers, with a lower minimum number of hours worked. This can be significant for those who retire before age 72 and want to continue to work part-time and make additional retirement contributions.
Compromise is tough; it’s hard. It means that you don’t get everything you want; not every provision works in our favor. One key change that could have a negative outcome is the elimination of the “Stretch IRA.” Historically, if you inherited an IRA from someone at their death, you may have had the option to “stretch” distributions over your lifetime based upon your age. More importantly, you did not have to take all the money all at once, resulting in a huge tax bill. This provision has been replaced with the 10-year rule under the new Act, which requires that beneficiaries withdraw all assets of an inherited account within 10 years, unless the beneficiary qualified for an exception. There are no required minimum distributions within those 10 years, but the entire balance must be paid out at the end of the tenth year. This change can be especially problematic for some beneficiaries if they are in their peak of their earning years, as it could push them into a significantly higher tax bracket.
While the new Act is detailed and complex, it is a change and it does create opportunity. Folks, I encourage you to evaluate your own retirement strategy in light of these new rules to make sure you find your opportunities. You just might find some of these changes to be an opportunity in 2020 and beyond.
And as always: Be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.
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