On Friday, Dec. 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 re-examine retirement planning previously completed for clients and prospects.
Some of the changes include:
- It allows more 401(k) plans to include annuities as a retirement option
- It takes required minimum distributions (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
- It eliminates a 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 provisions became effective on Jan. 1.
Below you will find provisions of the SECURE Act with a summary and my planning thoughts on those provisions. Next are the other provisions with a 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 relieving fiduciary responsibility when selecting and reviewing annuity plans. It also shifts the fiduciary responsibility from the employer to the insurance company selling the annuity.
By following the safe-harbor provisions, a fiduciary will not be liable for a participant’s or beneficiary’s losses caused by an insurer’s inability to satisfy its financial obligations under the annuity contract.
The SECURE Act allows the employer to meet their fiduciary responsibility, provided it chooses an annuity provider that is in good standing with state regulators, and the employer is not required to do full due diligence.
For people who do not regularly work with annuities, they may seem complicated and somewhat cryptic. This provides an opportunity for you to increase your value by being able to explain annuities to the plan sponsor and to its participants.
While the SECURE Act no longer requires employers to do full due diligence, it still seems prudent for a plan sponsor to have someone who can 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 turned 70½ after Dec. 31, 2019.
Because the impact for most retirees will be minimal, I do not see this change as a tremendous benefit. In my view, tax-efficient Roth conversions are still the preferred strategy.
Non-spousal Beneficiary Stretch Limited to 10 years
Non-spousal IRA beneficiaries can no longer stretch their RMDs over their lifetime. Under the SECURE Act, distributions are required by the end of the 10th calendar year following the year of the death. The rule does not apply to surviving spouses of the participant or IRA owner, disabled or chronically ill beneficiaries, beneficiaries who are less than 10 years younger than the participant or IRA owner or to the participant’s or IRA owner’s children who have not reached the age of majority.
Generally, the lifetime stretch is no longer an option for non-spousal beneficiaries, but it will continue to be important to provide asset protection for beneficiaries of large IRAs. Discussions with IRA owners about lifetime income for spendthrift beneficiaries or beneficiaries with abuse issues will also be 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 do not need the money, consider having them disclaim the inherited IRA.
By doing so, 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 10-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 higher-income tax brackets.
Life insurance can be used to try to replicate the stretch, but I am not a fan, except when there is a preexisting need for coverage.
No Maximum Age for Deducting Traditional IRA Contributions
The prior law prohibited a deduction if an individual turned 70½ before the end of the taxable year in which they made their contribution. The SECURE Act allows a deduction regardless of the age of the individual beneficiary.
With clients retiring later and working to older ages, this is a great benefit that allows them 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, Roth conversions and contributions to a Roth IRA will often make more sense. There are no RMD requirements with a Roth, so withdrawals will not affect your client’s Medicare premiums. And Roth distributions will not have any impact on the taxation of Social Security benefits.
Contact Iron Point to learn more ways the SECURE Act will affect your client’s retirement planning.
Article provided by Dunham and Associates