The Setting Every Community Up for Retirement Enhancement Act of 2019 (aka The SECURE Act — how they seem to reach at times to make the acronyms fit), has finally become law. The SECURE Act has several provisions in it, some encourage small businesses to start offering retirement plans to their employees, and other provisions make tweaks to existing rules about employee eligibility or types of income that qualifies for retirement savings.
The sections of the Act that I will focus on are the ones that impact older workers and retirees. There are a few sections in the Act which loosen the rules around the use of annuities in retirement plans. Using annuities within a retirement plan is an intriguing subject. In theory, annuitization is a useful tool for dealing with retirement income risks like longevity and investing. Being able to include annuities in a qualified plan, like a 401(k), could be positive if it leads to better education about and prudent usage of the products. What concerns me is, since the rules regarding annuity usage will be defined “later,” the potential for inferior (higher costs, smaller benefits and lower credit quality) annuity offerings or their misuse. So, like I said, the theory is reasonable, but the devil is in the details.
The increase in the required minimum distribution (RMD) age from 70.5 to 72 is a win. The older start age gives you more flexibility in your income planning. A by-product of this change is that the initial RMD is simpler to figure out by eliminating that half-year. Several people have been confused about when to take the RMD and which divisor to use. Interestingly, the qualified charitable distribution (QCD) option still begins at 70.5. The age increase is on top of a proposed IRS increase in life expectancy tables, which will also help with opportunities in our planning. However, the minimum penalty-free age is still 59.5, so there is now a wider window where you have an option and not an obligation. WARNING, if you are already taking RMDs, you are not impacted by the age change.
Until now, contributions to Traditional IRAs beyond age 70.5 were prohibited. The Secure Act eliminates this prohibition. While Roth IRAs never had this restriction, if you earned over the income limit, this option is not available to you. If you are taking RMDs, you still need to make those, but you can contribute, assuming you have earned income. Interestingly, the Backdoor Roth Conversion now becomes available for older workers. The Backdoor Roth Conversion is a way for some individuals to contribute to a Roth despite their income being above the income threshold.
Part-time workers classified as “long-term” (500 or more hours per year for at least three years) now must be allowed access to the company’s defined contribution plans. The primary inspiration for the inclusion is to help lower-income workers save for retirement. However, many retirees work part-time. The Act now provides an opportunity to add to your savings and even take advantage of matching potentially offered by your employer.
Arguably the biggest headline out of the Act is the elimination of the “stretch” IRA. The “stretch” IRA term describes the ability of beneficiaries of retirement accounts to stretch the RMDs over their lifetime, assuming the account owner correctly draws up the beneficiary form. Now inherited retirement accounts need to be empty within ten years, in most cases.
As an owner, the end of the “stretch” will more likely impact your estate plan than your retirement income plan. There are five “Eligible Designated Beneficiaries” that are exempt from this ten-year rule. The most significant is a surviving spouse. Minor children (NOT grandchildren), disabled, chronically ill, and anyone less than ten years younger than the account owner are the other “Eligibles.”
However, as a potential beneficiary of either an IRA or 401(k), the law change may significantly impact your planning. Depending on the size of the account, you may need to adjust your strategy for several years. Obviously, this is an event you will not be to plan for much in advance. You will have some flexibility since the only distribution requirement is the $0 value at the end of the tenth year. From a planning point-of-view, I’m not claiming this is creating a nightmare planning situation for you. On the contrary, needing to adjust for an influx of cash is generally a good problem to have. But, understand that this could create issues such as Medicare surcharges, Social Security taxability, and moving up the income tax brackets.
I wanted to write a quick recap of the SECURE Act changes that may impact older workers and retirees. Each of these changes may inspire you to revise parts of your retirement income plan. Hopefully, you found this post helpful. I encourage you to discuss with your advisors what if anything needs to change. When I say “advisor,” I include your accountant and estate lawyer since these changes can impact your taxes and will too.
If you would like to talk to me about these or other changes, please reach out to us, and we can talk about your specific situation.
Note: This information is not intended to be a substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.
Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin