Late Friday, December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement (Secure) Act, which launched sweeping retirement changes.
It creates an opportunity for financial advisors to reexamine retirement planning previously completed for clients and prospects. Some of the changes are:
- It allows more 401(K) Plans to include annuities as a retirement option
- It takes RMDs from April 1 of the calendar year following the calendar year in which the individual reached the age of 70½ to 72
- It significantly changes non-spousal stretch rules
- No Maximum Age for Deducting Traditional IRA Contributions
- It expands the availability of tax-qualified retirement savings to more employees
- It expands the time horizon in which individuals may keep their retirement assets in tax-deferred accounts and continue to contribute to them
- It allows the use of 529 college savings plan distributions to pay for registered apprenticeship programs and up to $10,000 in student loan payments.
- Most of the provisions will be effective after December 31, 2019.
Below you will find the Secure Act divided into two sections. First are provisions of the Secure act with a brief summary and my planning thoughts on those provisions. Next are all the other provisions with a brief summary for you to keep as a reference.
Section I: Secure Act Provisions with Planning Notes
Fiduciary Safe Harbor for Selection of Lifetime Income Provider
The SECURE Act allows more plans to offer annuities as investment options within 401(k) plans by helping to relieve fiduciary responsibility in selecting and reviewing annuity plans. The Secure Act shifts the fiduciary responsibility from the employer to the insurance companies selling the annuity.
By following the safe harbor provisions, a fiduciary will not be liable for losses that result to a participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the annuity contract.
The Secure Act would allow the employer to meet their fiduciary responsibility provided they choose an annuity provider who is in good standing with state regulators and the employer is not required to do full due diligence.
While I understand the general benefits of annuities, for people like me who do not regularly work with annuities, they seem complicated and if not even somewhat cryptic. You can provide a benefit by explaining annuities to the plan sponsor and to the participants. In addition, while the Secure Act no longer requires employers to do full due diligence, it still seems prudent that a plan sponsor has someone to help them fully understand the product and create a due diligence file.
Required Minimum Distributions for IRAs Moved to age 72
RMDs will move from April 1 of the calendar year following the calendar year in which the individual reached the age of 70½ to age to 72. This change will apply to individuals who attain 70½ after December 31, 2019.
Sorry, I do not see this change as a tremendous benefit as the impact for most retirees is minimal. In my view, tax efficient Roth conversions are still the preferred strategy here.
Non-Spousal Beneficiary Stretch Limited to 10 years
Non-spousal IRA beneficiaries can no longer stretch their required minimum distributions over their own lifetime. Under the Secure Act, distributions are required by the end of the 10th calendar year following the year of the death. The rule would not apply to surviving spouses of the participant or IRA owner, disabled or chronically ill beneficiaries, beneficiaries who are not more than 10 years younger than the participant or IRA owner or to children of the participant or IRA owner who have not reached the age of majority.
While generally, the lifetime stretch is no longer an option for non-spousal beneficiaries, providing asset protection for beneficiaries of large IRAs remains important. In addition, discussions with IRA owners about lifetime income for spendthrift beneficiaries or beneficiaries with abuse issues are critical. You should speak to Dunham Trust Company about the various benefits of an IRA Trust.
If your married client died in 2019 and the surviving spouse has not yet rolled the IRA into theirs, and they really do not need the money, consider having them disclaim the inherited IRA.
By doing this, the IRA can go to the children and if properly arranged, the children can benefit from RMDs based on their age and lifetime. Alternatively, if the spouse rolls it over into their IRA and then dies in 2020 or after, the children will be subject to the 10 year RMD with large IRA distributions at what will likely be higher tax rates than if they took it in smaller portions through their lifetime.
Analyze the benefit of smaller tax efficient Roth conversions each year while the IRA owner is alive. This may have taxes paid by the IRA owner at lower tax rates than the potentially higher rates the beneficiaries might pay under the ten-year rule.
Spread the distribution of the IRA among as many beneficiaries as possible (children and grandchildren) to potentially avoid having the 10 year stretch create large distributions for fewer beneficiaries at what be higher income tax brackets.
There are ways of using life insurance to try to replicate the stretch, but candidly, I am not a fan unless there was a preexisting need for life insurance.
No Maximum Age for Deducting Traditional IRA Contributions
The prior law prohibited a deduction if an individual attained age 70½ before the end of the taxable year in which they made their contribution. The Secure Act will allow a deduction regardless of the age of the individual beneficiary.
With clients retiring later and working at older ages, this is a great benefit allowing your clients to continue to save in a tax efficient manner. In this regard, it brings the Regular IRA on an equal footing to its cousin, the Roth IRA. However, when it is tax efficient to do so, many times Roth conversions and contributions to a Roth IRA will make sense. There are no RMD requirements with a Roth, so Roth withdrawals will not affect your client’s Medicare premiums, and Roth distributions will not have any impact on the taxation of their Social Security benefits.
Section II: For Your Reference, The Secure Act
For a more expansive description of the provisions of the Secure Act provided by the law firm Dechert, please click here to receive a copy and keep it as a reference piece or to share with colleagues.