There’s no security on this earth, only opportunity.
~General Douglas MacArthur
Question: What is the SECURE Act and how might it affect my financial planning?
Answer: On December 20th, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, was signed into law. There’s been a lot of media coverage about the Act and this is the chance to hopefully clear up a few of the more general questions associated with the changes that went into effect January 1st, 2020.
Security as a noun is defined in several ways: the state of being free from danger or threat, a thing deposited or pledged as a guarantee, or a private police force. As it applies to financial planning, security is a vague, uncertain, and obscure concept.
The SECURE Act of 2019 has many nuances and provisions that have the potential to affect employers, employees and retirement plan beneficiaries. The Act itself was attached to a year-end appropriation bill that Congress “had” to pass in order to keep our government up and running.
Rather than get into the weeds with all the particulars, let’s focus on the conditions that could likely influence a number of Americans in various stages of life planning. The primary purpose of the Act is to broaden access to tax-advantaged retirement savings accounts, and to ultimately assist with preventing, where possible, the potential problem of Americans outliving their assets. It is designed to accomplish the following:
- Make it easier for small business owners to set up “safe harbor” retirement plans that may have lower costs and administrative burdens.
- Allow part-time employees to participate in an employer-sponsored retirement plan.
- Remove the age cap that limits contributions to traditional IRAs after age 70 1/2, which would give people more time to contribute toward retirement as people are working and living longer.
- Delay the required minimum distributions (RMDs) age to 72, allowing the account to continue growing.
It’s a step in the right direction to encourage Americans to save for their future and the long term. The majority of questions I’ve received are about a provision that would eliminate what’s known as a Stretch IRA, an estate planning strategy that allows IRA owners to bequeath or pass their individual retirement accounts (IRAs) to much younger beneficiaries, like children and grandchildren. Under current rules, the younger heirs can receive the required minimum distributions over the course of their actuarial lifetimes. Payouts tend to be relatively small for children, explains Raymond James Washington policy analyst Ed Mills, which would allow a large portion of the account to continue to grow tax-deferred over decades. Through compounding, the inherited IRA could eventually provide for the child’s retirement.
The SECURE Act instead gives non-spouse beneficiaries (including trusts) just 10 years to withdraw all the money from inherited IRAs, 401(k)s or other defined contribution plans. These supersized distributions would likely trigger higher taxes sooner rather than later, meaning over the course of the heir’s life. There are some exceptions, but under the proposed new rules, Mills estimates that an additional one-third of the inherited accounts would be owed to Uncle Sam.
There are upsides as well. As an example, Charlie’s Dad (Wilbur), passed away on January 3rd, 2020 with $400,000 in an IRA naming Charlie as sole beneficiary. Charlie is 60, still working, and earns $150,000 per year. He plans to retire at age 65, in five years and his income will Dad’s IRA until after Charlie retires. Prior to the SECURE Act of 2019, Charlie would have to take distributions during the first five years, rather than ten as outlined in the SECURE Act. Now Charlie can wait to take distributions during years 6-10, when he expects his income to be much lower at retirement, thereby potentially saving taxes.
One important caveat of the SECURE Act of 2019 is that four groups of designated beneficiaries are carved out and will see “business as usual” keeping the so-called Stretch IRA in place. This applies to a very small percentage of beneficiaries including the following: Spousal beneficiaries, Disabled beneficiaries, as defined by the IRC Section 72(m)(7), Chronically ill as defined by IRC Section 7702B(c)(2) with limited exceptions, and individuals who are not more than 10 years younger than the decedent. As disclosed below, always check with your tax planning professional on details such as these.
If you have questions about how the new SECURE Act of 2019 law may indicate be cause for review and possible adjustments to your estate and retirement plans, please let us know.
The information contained herein has been obtained from sources considered to be reliable, but accuracy and completeness are not guaranteed. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
All investments contain risk, including loss of principal. Views are as of January 5th, 2020 and subject to change based on legislative conditions and other factors “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.