The SECURE Act – Is it Really a Good Thing?
Like most answers we give…it depends. The SECURE Act passed with flying colors at the end of 2019 and dictated several MAJOR changes to the rules around retirement plans. There were also some important tax planning notes. Some of these changes were much needed, some were unwanted, and some will require immediate attention. There also remains a number of questions regarding the bill. Our goal today will be to cover the items that we believe will have the most impact on the individuals we work with and address what we believe will be the most common questions.
The Highpoints
- 72 is the new 70½… The Required Minimum Distribution age has been increased to 72. This is great news for those who didn’t reach 70½ by 2019, but not so great for those who did. If you turned 70 ½ in 2019, you are grandfathered into the old rules and will be required to take your 2019 RMD by April 1, 2020.
- Forever Young IRA Contributions…There is no longer an age cap on contributing to your traditional IRA. If you have earned income, you can still be saving for retirement no matter your age. However, it is important to note that you will still be required to take your RMD if you have met that 70½ birthday.
- More Money and Less Reporting for Business Owners…There are several sections in the bill that could benefit business owners. Among them, two tax credits—an increased credit for starting a plan that could put up to $5,000 in your pocket for 3 years and a new credit of $500 for simply inserting an automatic enrollment feature in your plan. The safe harbor rules just got easier, an option to relieve yourself of a huge fiduciary standard by simply adding an annuity option to your plan and the ability to use “Pooled Employer Plans” across industries in order to lower plan administration time and costs. Oh…and I almost forgot the biggest opportunity of all created by the SECURE Act: You now have the ability to open a plan for 2019 up to the moment you file your tax return, even if you extend your return in 2020. It is no longer “sorry for your loss” if you don’t have it open by year-end.
- Tax Relief…Here is the list:
- The Cadillac Tax on employer health care plans was delayed until 2022
- Penalty-free distributions available from retirement plans and IRAs up to $5,000 for births and adoptions
- 529s can now be used to pay off up to $10,000 of student loans
- Kiddie-Tax introduced in the Tax Cuts and Jobs Act is gone
- Itemized Medical Expense floor was reduced to 7.5% of your Adjusted Gross Income versus 10%
- Extension of the above-the-line deductions for tuition and related expenses
- Multiple credits for business owners were extended such as the credit for paid family and medical leave, health insurance costs, work opportunity credit, new markets, etc.
A Not So High Point
The good news is there is only one item that made this list. There is also more good news about it. It may or may not affect you and your family. There is a new requirement that defined contribution plans will need to disclose a “lifetime income” analysis once a year for retirement plan participants. The DOL has been charged with coming up with this calculation. I bet you are asking, “How can that be bad?” Well, in our experience, estimates like this are not accurate and depending on the measures used, they could vary extremely from actuality. Our fear is that participants would come to rely on this as an absolute and be unpleasantly surprised come retirement time.
The Low Point
In fact, this point qualifies as downright ugly. Washington had to find a way to pay for a few things that hit the highpoint list and maybe some other things…like national debt. So here it is:
Your children’s taxes are going up when they inherit your retirement accounts. They can no longer stretch an IRA over their lifetime. They must take all of it within 10 years. Imagine you have a million-dollar IRA. This would mean that they would tack on an additional $100,000 of income to their tax return over the next 10 years. Worse still, you may have set up a trust to dictate distributions to your children. Since there is no Required Minimum Distribution for your children, your trust may force a payout of your IRA all within one taxable year. The bottom line is that it is time to review your current situation and opportunities, because there are options and you can plan around it. In fact, you can set up something that would be taxed identically to a stretch IRA. The key is that you need to start planning today.
One of my favorite quotes by Warren Buffet – “Someone is sitting in the shade today because someone planted a tree a long time ago” – applies to more than just the investment world. You might be simply educating yourself and saving your pennies so your dollars will be there. Or maybe you are teaching your children to not take what they see for face value so they can fend for themselves. Or perhaps you are setting up a legacy for generations to come. Whatever it is, I hope you are planting and nurturing that tree. The shade will be well worth it.