Congressional bill writers love acronyms, which make obtuse legalese sound sexy. Witness the SECURE Act of 2019, “Setting Every Community Up of Retirement Enhancement Act.” With 29 provisions, the text is more “ponderous” than “sexy.” With SECURE Act changes, many of you should review, potentially revise, your retirement plans. While consulting your advisor is recommended, in this brief column we highlight some of the more impactful provisions for individuals.
A key change is the age when Required Minimum Distributions (RMDs) for Qualified IRAs begin, moving from age 70 ½ to 72. The change doesn’t apply to those already 70 ½ or older by 12/31/2019. Also, the IRS proposes updating life expectancy tables by 2021, which will change the calculation of your yearly RMD amount.
Congress was concerned about increasing life expectancies and data indicating Americans were not saving enough toward financial independence. Per a 2018 Northwestern Mutual Life survey, 20 percent of Americans have no retirement savings at all, while a third of those nearing retirement have saved less than $25,000. This advisor recommends $1 to $1.5 million in today’s dollars as a minimum target. Of a $1 million nest egg, if you withdraw money at a 5 percent annual rate to run your life, that’s $50,000, $4,167 per month gross, or $3,334 at an average tax bracket of 20 percent; $3,542 at 15 percent. To this number add Social Security, net of deductions for taxes and Medicare insurance premiums. How does that square with your envisioned lifestyle, family and survivor needs, health status, longevity assumptions? You could get by on less but is “less” a good planning objective?
One change benefits those who work past age 70 ½. Previously, a person older than 70 ½ could not contribute to a traditional IRA. Now you may contribute to an IRA at any age if you have earned compensation. But, illustrating the adage that “the government giveth and the government taketh away,” lifetime stretch IRAs are gone, with a few exceptions. Once a viable strategy for adding to retirement security for non-spousal beneficiaries like children or grandchildren, the Act requires inherited IRA and defined contribution account assets to be withdrawn within 10 years and taxes paid.
Exceptions include a spouse, disabled or chronically ill persons (with strict criteria), and persons not more than 10 years younger than the IRA owner, generally siblings around the same age. A child of the deceased (but not grandchildren) who hasn’t reached the age of majority will be able to stretch until the age of majority, with the remainder then subject to a 10-year distribution. Tax-planning will be important. Does one take it out each year for 10 years, in select years, or all at once in year 10? That depends on growth assumptions and assumed yearly tax brackets going forward. Situations where IRA monies are directed to a trust may need legal review so as to not conflict with the 10-year distribution rule.
Jamie Hopkins, finance professor at Omaha’s Creighton University, writing in the February, 2020, Journal of Financial Planning, reinforces the idea of using life insurance as a “tax-advantaged way to pass legacy.” Says he, “It might make sense for many individuals to purchase life insurance as the primary legacy tool or to use life insurance death benefits, which can be received income- and estate-tax free, to offset the higher taxes associated with a 10-year distribution period.”
Higher tax-bracket individuals generally will want to delay IRA withdrawals until at least 72, and then take only the RMD, no more. Using life insurance cash value loans to provide tax-fee cash flow prior to age 72 and as a supplement thereafter, could make sense. If you have cash value life insurance policies in force they should be reviewed as to current performance, viability given current objectives, and strategies related to SECURE Act changes.
The Act allows penalty-free withdrawals up to $5,000 from retirement plans for the birth or adoption of a child, and penalty-free withdrawals up to $10,000 from 529 education savings plans for repayment of certain student loans. Are these withdrawals wise? It depends on your long-term objectives, alternative uses of capital, and the long-term impact of money no longer in an account to grow and compound.
The SECURE Act allows the inclusion of annuities in 401(k) plans, and insurance companies are gearing up to provide products. Annuities are complex contacts that must be understood relative to your personal circumstances and big picture. Many firms provide participants with a list of plan investment options to choose from with little or no guidance. Work with a trusted advisor who can integrate all aspects of a retirement savings plan into a cohesive strategy.
True retirement security and financial independence is up to you. The SECURE Act merely adds choices, new rules, and complexity.
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;email@example.com. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.