Financial Planning – January 2020
5 Ways the New SECURE Act Could Affect your Plans to Retire
In an effort to help more Americans plan a successful retirement, the Setting Every Community Up for Retirement Enhancement Act or “SECURE Act” was signed into law last month. While some of the changes in the new law should in fact help prepare more individuals for retirement, there are a few statutes that could affect popular estate planning strategies in a negative fashion. Below you’ll find a summary of what we feel are some of the most important changes affecting IRA accounts.
1. Prior Age Restriction on IRA Contributions Have Been Eliminated
What does this mean exactly? Prior to the new SECURE Act, individuals were unable to make contributions to their Traditional IRAs (Individual Retirement Accounts) after they reached age 70½. This could have affected families in a few different ways. For a couple with one working spouse and another retired one, they were previously limited to deferring their household income in to the retired spouse’s IRA. Furthermore, if someone was working for an employer with no retirement plan or if the individual was not eligible to make contributions to their employer’s retirement plan, they were prevented from saving for their retirement (via their IRA) after the age of 70½. With the average life expectancy increasing from age 76.61 in 1999 to age 78.87 in 2019 and for those who reach age 65 having an average life expectancy of age 84, for men, and age 86.5, for women , there is no question that those who are less prepared for retirement may need to work longer and save more.
2. Required Minimum Distribution Age Increased from 70½ to 72
If you didn’t turn 70½ by December 31st, 2019 you might not be familiar with the term Required Minimum Distribution (RMD). The delay in the RMD age from 70½ to 72 is generally considered a “Win” for individuals who have savings or income streams outside of their retirement accounts. The delay in the RMD age will allow investors to continue to compound and grow their Traditional IRA accounts on a tax-deferred basis for a longer period. Roth IRAs do not have RMD requirements until the assets pass to a Non-Spouse Beneficiary.
3. Eligibility Changes for Part-Time Workers to Participate in 401k Plans
Under previous law, employers were able to exclude part-time employees from participating in their company 401k if they didn’t work at least 1,000 hours during the year. With the new amendments, part-time employees can now participate if they either fill the old requirements (stated previously) or if they work at least 500 hours a year for 3 consecutive years. According to the 2016 Current Population Survey, 18.3% of all workers are currently working part-time i.e. less than 35 hours a week, and of that group of part-time workers almost 64% of them are women . This new change can help families that have one part-time spouse by allowing them to put savings into each spouses’ respective 401k plans rather than just one. Unfortunately, employees currently working 500 hours a year will not be eligible for their plan until 2024, as the new provision will not apply to plans until 2021.
4. Life-Time Income Disclosure Now Required on Defined Contribution Plan Statements
For individuals participating in their employer’s defined contribution plan, there will soon be a new projection added to the year-end statement. In addition to the performance metrics, contribution history, and asset allocation; a new life-time income disclosure will be included to provide an estimated monthly income stream a current account balance could provide, if used to purchase an annuity. Individuals will be given two projections within this new disclosure. One that will show how much income the participant could receive over their life-time (Single Life Annuity) and another that will show how much income the participant and their spouse could receive, over their joint life-time (Joint and Survivor Annuity). While purchasing an annuity may or may not be the optimal choice, having these estimates will give soon-to-be-retirees a better idea of how much monthly income their plan could provide over retirement and whether they need to be saving more.
5. No More Stretch IRAs
The SECURE Act will also have an impact on the Stretch IRA Strategy for Non-Spouse inheritors of an IRA. Currently, when inheriting an IRA from a Non-Spouse, an individual has the ability to take annual RMDs over the entirety of their lifetime – hence the term “Stretch”. Starting in 2020, any non-spousal IRA that has been inherited will have to be distributed completely by the end of the 10th year following the inheritance. This has the potential to greatly shorten the time period that the inheritor could benefit from tax-deferred compounding (Traditional IRA) or tax-free compounding (Roth IRA). Financial Advisors & individuals will need to review the IRA strategies they have employed if they have been counting on utilizing the Stretch Provision to pass along wealth to younger generations. In addition, Financial Advisors and individuals will need to more closely scrutinize whether utilizing Roth Conversion Strategies will still make sense in light of these changes affecting the Stretch Provision.
While there are over two dozen changes that have been put in place with the new SECURE Act, these are a few of the more prominent ones that could affect Retirement Strategies. To read more about how the retirement planning landscape is changing, you can find more information on the SECURE Act here. As always, if you have any question about how the SECURE Act impacts your situation or you have questions regarding your plans to retire, feel free to call us at 760-602-6920 or email us at email@example.com to set up a free consultation.
Koa Wealth Management
11260 El Camino Real, Unit 220, San Diego, CA 92130