With the new year comes new endeavors, goals, and even laws. Effective December 31, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (The Act) enacts a few adjustments that effect your retirement savings and legacy planning strategies. The SECURE Act, coming in with yet another far-reaching name to fit a catchy acronym (like the USA PATRIOT Act), is designed to improve laws that were established on now-outdated facts, some as far back as the ‘60s¹. The Required Minimum Distribution (RMD) rule beginning at age 70 ½ was created when life expectancy in the United States was 70.02 years, compared to average lifespan in 2019 of 78.87. The updates are welcome, and most benefit the saver, yet there are some nuances to highlight for potential incorporation into your financial plan.
The age to begin Required Minimum Distributions is now pushed back to age 72. Going along with this update is the dissolution of qualified account contribution age limits, so it is now possible to contribute to a traditional IRA or other qualified retirement plan after age 70 ½. These two changes go hand-in-hand for saving more money for your retirement years while also extending the life of an optimized tax strategy. Compared to the old 70 ½ law, if one were to live to age 89, a $500,000 portfolio earning 5% annually will end-up with $33,500 more with RMDs beginning at the later age 72. Although pre-tax savings can now increase, contributions must be closely monitored as the necessity of earned income is still the gatekeeper for eligibility. Generally, as life expectancy increases so do the number of years one is physically able to work and earn income – with almost 70% of the Baby Boomer generation expecting to retire after age 65 or never even officially retire. Removing the age limit for qualified plan contributions also extends the window to complete Roth IRA conversions if applicable to your income tax situation. The new laws not only effect distributions at a certain age, they also update posthumous distribution guidelines.
Under the old law an inheritor could “stretch” the life of an inherited qualified account over the new owner’s lifespan – new year, new law. Beginning in 2020, unless the inheritor is an eligible beneficiary (surviving spouse, disabled, chronically ill, no more than 10 years younger, or child of the deceased) the inherited account must be fully liquidated by the end of the tenth calendar year following the owner’s death¹. Ultimately, this is a friendly reminder to review who exactly is listed as beneficiary. The old stretch law allowed the tax burden to be spread over many years, whereas now the entire amount is squeezed into 10 years. As a note, each withdrawal from the qualified account will be taxed as ordinary income to the inheritor, so when it comes to succession planning it will be imperative to consider the different tax-efficient strategies with a reduced time frame. This change does not necessarily impact the current account owner, as that individual will be deceased at the time of effectiveness, but a beneficiary or potential inheritor of assets must be aware of this provision. And the law changes do not stop at just these few.
The SECURE Act covers many areas of retirement planning, not just those near retirement age. Penalty-free withdrawals from retirement plans can now be used, up to a certain limit, for expenses incurred from birth and adoption. If you are a tenured part-time worker the new law changes could allow participation in your employers’ 401k plan, greatly increasing the opportunity for retirement savings security. And funds from a 529 education plan now have an expanded list of “qualified” expenses that are subject to favorable tax status, including homeschooling and apprenticeships. The Act is lengthy and detailed, but the features extracted above can have the broadest effect on savers.
As the name of the Act states, these changes are intended to be improvements to the framework of your financial plan, but how do they actually effect you? Every penny saved is a long-term benefit to help you live your best life in retirement, but saving for retirement is a process that can take many working years to achieve “success”. In fact, as the 2019 Transamerica Center survey results revealed, 39% of Baby Boomers have saved $250,000 or more in all of their retirement accounts, yet the same survey showed that in order to feel financially secure entering retirement they will need to have saved $500,000. Distributions must start later, savings contributions can continue longer, various accounts have new spending applications, and a laundry list of other changes are in place, yet consistently saving money as early in your career as possible is the best approach for a fruitful retirement. Each law is a unique standard that might or might not apply to your financial life, but keeping up with a financial plan and navigating the logistics of each legislative change can be an unmanageable burden. If you are approaching retirement talk to your financial advisor about how the SECURE Act effects your specific situation and consider what updates need to be made to your plan.