How the SECURE Act Will Impact Your Retirement, Ep #102

The SECURE Act is the biggest piece of retirement legislation to pass since 2006.

On this episode, we discuss what the SECURE Act is and how it will affect you and your retirement plans. The acronym SECURE stands for “Setting Every Community Up for Retirement Enhancement.”

In our breakdown of the new bill, you’ll learn about the highlights including new IRA rules, changes to 401K’s, non-retirement changes, and tax extenders.

The Stretch IRA is not as stretchy

One of the most impactful changes in the legislation deals with the Stretch IRA provision for non-spouse beneficiaries. Under the old law, upon a person’s death, the non-spouse beneficiaries of their 401K’s and IRA’s could withdraw savings over the span of their entire lifetime.

Now, as of January 1, 2020, the Secure Act compresses that time period to only 10 years after the year of death, thus speeding up the time frame for taxes to be paid on these pre-tax savings. This complicates some old strategies being used, but creates new planning techniques for others.

There are a few eligible designated beneficiaries that will avoid the 10 year payout. These include:

  • the surviving spouse of the deceased account owner
  • a minor child of the deceased account owner
  • a beneficiary who is no more than 10 years younger than the deceased account owner
  • a chronically-ill individual
  • a disabled individual

Tune in to see how you may need to tweak your retirement withdrawal strategies to best work for you and your heirs.

More changes to IRA’s

The Stretch IRA wasn’t the only thing that changed with IRA’s. The required minimum distribution (RMD) age was raised from age 70 ½ to 72. This means, for those yet to reach 70.5 by 1/1/2020, that you won’t have to take funds out of your IRA until age 72. You’ll have a year and a half longer to convert those funds to a Roth IRA, depending on tax brackets.

Despite the RMD age moving back, you still have the option to make a qualified charitable distribution (QCD) at age 70. If you’d like a refresher for some of these financial acronyms we’re mentioning, check out episode 63, our Financial Acronymology guide.

Additionally, those over 70 and still working can now contribute to a traditional IRA if they have earned income. In the old law, this ability stopped at 70.5. But people are living and working longer now (without adequate retirement savings for many), so the SECURE act makes this possible.

Good news for 401K’s

Finally, we get to the part about setting communities up for retirement. With the changes in the Secure Act, more small business owners will be able to offer 401K’s to their employees.

The bill makes it easier to be auto-enrolled to help those people that never get around to setting up their 401K contributions. Part-time employees will also benefit from the new bill. Now part-timers who have worked 500 hours over the past 3 years will have access to 401K’s. These changes are designed to make retirement savings a bit easier.

How will the SECURE Act change your financial plans?

The Secure Act is a great reminder of how quickly laws can change. Without close attention, your original intent could no longer be the most optimal strategy for your retirement plans.

For many, this will create new tax planning strategies. Especially for those age 60-72. Many will want to take another look at Roth conversion opportunities. It’s also a good idea to consider tax brackets of beneficiaries compared to your tax bracket to help make best decisions on withdrawal timelines.

One of our primary responsibilities is to help you uncover tax saving or planning opportunities when they become available. Remember, financial planning is like putting together a puzzle. Make sure you have all the pieces by learning as much as you can to improve your financial opportunities.

Outline of This Episode

  • [3:04] The biggest changes with the Secure Act are to IRA’s
  • [11:44] Small businesses will find it easier to offer 401K’s to their employees
  • [17:07] Non-retirement changes
  • [18:55] The extenders

Resources & People Mentioned

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Full Transcript:

Chad: Welcome to our first episode of 2020. Chad Smith here, with my regular co-host, Mike Eklund. Today, we are breaking down a new piece of legislation, a large piece of legislation, the biggest retirement piece of legislation since the 2006 Pension Protection Act passed and this one is called the Secure Act. We’re going to break down some of the big questions you have as you may’ve heard or read some headlines about it. And we wanted to make sure that you have our take on some of the biggest things that may be affecting your retirement decisions. And then some of the other little nuances that came through the pipeline there.

Mike: Yeah, it was a bit last minute too. It happened in late December and was not expected. And then like we’ve seen in the past, now all of a sudden, a lot of these things have changed regarding IRA rules, 401K plans, some tax extenders, some other provisions that are new and now allowed. So our goal is to give you a quick summary of what’s going on.

SECURE Act Overview [1:16]

Chad: And what you need to pay attention to, because there’s a lot of pages in the bill and we know it’s likely, you’re not sitting by the fireside this winter reading the SECURE act. But we do like to read these things and work through what could be an opportunity or a risk for you. So the SECURE act stands for “Setting Every Community Up for Retirement Enhancement.”

Mike: I did not know that.

Chad: Yes, so this is an idea of expanding some retirement saving opportunities. But you’ll see as we walk through here, some of the things have gotten a little more restrictive and will force you to take another look at the planning that you’ve done up to this point, to make sure that you’re taking advantage of the changes.

Mike: I mean, some of these items might benefit you and some may negatively impact you as well. So it just depends on your situation and what the change of law was.

Chad: So we’ve got a breakdown here, Mike. You’ve put together an outline for us: the first section on new IRA rules, and then we’ll walk through that second section on 401k changes, particularly with small businesses.

Mike: That’s primarily the focus with the law changes.

Chad: And then there’s a few non-retirement changes that we’ll walk through, and then extenders of certain percentages, deduction limits. So those are the four main areas that we’ll cover with the majority of our time likely spent in the first area here. So you want to break down some of those?

New IRA Rules – Stretch IRA [2:42]

Mike: We’re going to focus on the main points here. We’ll have a couple of links in the podcast notes with more details. We don’t have the time or energy today, to go through every single change in the law. But the main points, we thought that our listeners would appreciate. So as Chad mentioned to start with, the key thing is with your IRA or individual retirement account. One of the main changes that occurred with the SECURE Act is the elimination of the STRETCH IRA for non spouse beneficiaries of defined contribution plans which are 401ks and IRAs. So what that means is historically what has happened if someone inherited an IRA, let’s say, a child from their parents, they’re required by law, over their lifetime, let’s say 30, 40 years to withdraw those funds. And a certain amount, it’s called an RMD per year or required minimum distribution. And so that was the old law for non-spouse beneficiaries. But now with the new law going forward, that account must be withdrawn within 10 years from when you inherit it. And so, an example of that, let’s just say a 45-year old inherits a million dollar IRA. Well, that 45-year old now has to withdraw the entire balance before the age of 55. Where in the past, based on the factors and the details of the RMD per year, that individual might have had, 35 to 40 years to withdraw those funds.

Chad: So it’s compressing that time frame and basically speeding up the potential tax that will be paid to Uncle Sam.

Mike: Exactly. In that previous example, if it was a million-dollar IRA, you have to pull in a million dollars that’s going to be taxable over the next 10 years, where before you might have 40 years. So, you can imagine what that may due to someone in their peak earning years, it may push them into higher tax brackets.

Chad: Much smaller amounts was the old way. Now it’s going to be much larger required distributions, because with that 10-year time frame, you don’t have the specifics of having to pull it out each year. So you could essentially wait all the way until the 10th year, of course. But it would be all taxable in that tenth year at the top tax rate.

Mike: Yeah, that’s going to require some tax planning, as expected. The one thing to note here, is that if you inherit the IRA in 2019 or earlier, this does not impact you. So the old law is still fine. It’s really from January 1st, 2020 going forward. Separately, they’re also beneficiaries that are not subject to the 10 year rule. Such as a spouse. So if your spouse inherits the IRA, the spouse then can take it out over their lifetime. There’s disabled are not required by the 10 year rule, also the chronically ill. Now, obviously, there’s some IRS rules and what that defined as we won’t go through today, but there are some.

Chad: We’ll have that linked in the show notes.

Mike: And then if an individuals is a beneficiary, and is not more than 10 years younger than the person that passed away, then they can take it out over their lifetime. So this really impacts most the time, children of parents and how quickly they have to withdraw funds from their retirement accounts. The final thing I’ll just mention, is if a minor child, someone under the age of majority, let’s just say 18 for this example, if they inherit the funds until they are 18, they have a much smaller withdraw requirement and then from 18 to 28 is when they’d have that 10 year time period. So there’s some nuances with the rule. But the big thing is the elimination of the stretch IRA. which was a big tax planning strategy. And now obviously for most folks, it will not be a benefit going forward.

Chad: I looked up the age of majority, and in almost every state it’s 18. Mississippi is 21. And then there was another state that it was 19. And then almost all others were 18. It’s interesting on that front if a minor child does inherit the IRA, let’s say at 5 age 5, then they’ll have 13 years of minimum required minimum distributions and then they’ll have the 10 year requirement tacked onto the end of that.

Mike: Exactly.

Chad: So that’s an interesting aspect. It does extend that time frame, but it’s not for life, right. Like it would have been previously in the old law.

New IRA Required Minimum Distribution [6:56]

Mike: So that’s probably the biggest, I would say, of all the changes. We want to start with that. The next thing on changes with IRAs is the required minimum distribution, which is the amount historically that’s been when you turn 70 and a half the year, you turn 70 and a half. You need to start withdrawing a certain amount per year. And there’s IRS tables, that shows, this is how much you have to withdraw. And if you don’t, you get a large tax bill or tax penalty. They’ve moved that from age 70.5 to 72. So not a huge change for a lot of folks. It’s probably easier to understand because the 70.5, why they came up with that, I have no idea. But now it is age 72. Now, keep in mind, this only applies to individuals who turn 70.5 in 2020 or later. So, if you turn 70.5 in 2019, the old RMD rules apply.

Chad: I’m disappointed, Mike, in your research that you didn’t have the reason why the old law was age 70.5.

Mike: I did not. I’m sorry I didn’t spend the time extra time on that. Maybe you know?

Chad: I don’t. Also, why is it 59.5 too? You know, it’s interesting

Mike: Negotiation probably

Chad: Let just meet in the middle. So, yes, that is a factor. And then I’ve read and heard some other phrases thrown about around this topic. And some have coined it the RMD tax trap. Now, because there will be people that hear this or read and learn of it and think that they can wait until 72 to start. However, if they turn 70.5 prior to December 31, 2019. They are still under the old law. So they have to take the withdrawal regardless because it is a 50 percent penalty on the amount that you are supposed to take out of that IRA. If you do not do it within the time frame you are expected to, that’s a pretty hefty penalty. One of the heftiest penalties.

Mike: If you have a large IRA, that could be a very large tax bill. So it’s pretty important that if you are unsure, talk to a professional. If you’re around 70, 71, you may want to make sure, hey, am I supposed to go by the old rules or the new rules?

Chad: On the bright side, that adds a couple extra years to that magic planning area that we like to talk about a lot from age 60 to 70 to now. Right. It gives you 12 years to where you can really maximize Roth conversions potentially. I mean, you’d still have the Social Security being paid at 70, but that gives you a couple extra years there to maneuver without a required minimum distribution. If you turn 70 and a half in 2020.

Mike: That is probably the second biggest change with the new law.

Q.E.D. – Qualified Charitable Distributions [9:23]

Mike: Similar things regarding IRAs. We just wanted to bring up what’s called QCD or qualified charitable distributions. They are still allowed to happen at age 70.5. As a reminder, you may have heard of us talk about this in the past.

Mike: You can withdraw, but up to a hundred thousand from your IRA and send it directly to a charity. And it does not show up as income on your tax return. And so now actually you have the opportunity between 60 to 70 to reduce the size of your retirement account by moving money directly to charity and lowering your income. So this could obviously offer some tax planning opportunities as well.

Chad: And as you’ve noticed, we’ve been throwing the acronyms out on this one. So I’ll remind listeners, we did an episode on financial acronymology. It was episode 63 where we walk through a lot of those. If you want to understand more about some of these things that we’re breezing through here. But yeah, that’s it’s still a nice option to use if you’re charitably inclined.

Additional Changes to IRA Accounts [10:20]

Mike: There’s a couple other small changes regarding the individual retirement accounts, the IRAs. One is you can withdraw up to five thousand from your IRA for qualified birth or adoption and you have no 10 percent penalty on that. The withdrawal would still be taxed, so you still get taxed on the other five thousand, but you wouldn’t have to pay the 10 percent penalty. And then finally, before, if you were still working and past the age of 70, you were no longer able to contribute to a traditional IRA. Now, if you’re over the age 70 and a half and you have earned income, you can contribute to a traditional IRA. As a reminder, the limits I believe for 2020 is $7,000 if you’re over 70 per person. So, something to think about if you are working past 70 of additional retirement.

Chad: Yes, that’s a nice one. A nice little extra deduction there potentially, especially for those working maybe part time in retirement still too. If on the cusp of a certain tax bracket, this can be a nice little extra opportunity to bring them below that.

Mike: I think something they’ve probably missed a long time ago when they’ve set these rules up and said that fixed it this time around. Really? They obviously, as Chad mentioned, begin with the goal of this was to get people to save more. So not limiting people when they can save was part of the strategy there.

Small Business Retirement 401k plans [11:33]

Mike: So that’s the summary related to the changes in the individual retirement account rules. Now, we will walk through some of the changes regarding 401K plans. It’s primarily related to small businesses. But there is one change we may see in larger plans, and that is it will be easier for plan sponsors to pick companies to add lifetime income annuity options to the 401K plan. What this means if you’re working for X, Y, Z company, you retire, not sure what to do with your funds. There may be an option added to your plan where you could buy an annuity, within the plan and that monthly income annuity would send you a check every month for the rest of your life. So historically, companies didn’t want to add this because the restrictions were pretty limited and there was some liability risk for them if something happened to the annuity provider and some of those restrictions have been eliminated or reduced.

Chad: I’m sure there was plenty of lobbying around this particular topic of the legislation, so I have to add that this particular decision, if you are thinking about a decision like this, is extremely important to analyze within the context of your all of your income sources. Right. Because it can sound very attractive in the presentation when ever you are being presented with an annuity option. But you want to understand all of the risks around it. So talk to your financial adviser around this topic. And a CPA.

Mike: Yeah, the summary there is you’ll probably see more annuities in your 401K and your policy, more push from annuity providers for you to purchase the annuity in the 401k when you retire versus what a lot of people have done in the past, just roll it over to an IRA.

Chad: Luckily, as you know, and you’ve heard on his podcast a lot is the importance of the fiduciary duty. So, you’re going to be working with a financial advisor if you’re listening to us that is a fiduciary and they’re going to be putting your best interests first so they can walk you through these decisions with your interest at the top of the list.

Mike:  Exactly.

Establishing 401k Plans for Employees [13:38]

Mike:  And then the other things regarding 401k’s, primarily related to incentivizing small business owners to establish a 401K plans for their employees, and then also make it easier for employees to have access to the 401K plan. So a few things they did there is they’ve off a tax credit for establishing a 401K plan and that credit can range between $500 to $5,000. As I mentioned, it’s primarily focused on small business owners. There’s also credit for auto-enrollment. So what that means is, if you join a company tomorrow and they automatically put you in the 401K plan, you don’t have to sign up yourself as they will opt you in. You have to opt out if you don’t want in. The company would get about a $500 tax credit for that. And then in addition, if your employer opts you into a 401K plan, there’s a question of what percentage of your salary they should put into the 401K plan. Historically, that number has been around 3 percent. What the law has said is they can you can have that number at 3 percent or they can go up to is as high as 15 percent. So the law is setting some boundaries on that for employers.

And then finally, if you’re a part-time worker and you work for a company at least 500 hours for the last three years, you’ll now have access to the 401K plan as well, where historically you’ve had to work about a thousand hours in one year to access the 401K plan. But now you could be a part-time employee and not have to work as much to get access to it. Now that doesn’t start until 2020. So the reality is, if you’re a part time employee, you probably won’t have access to the plan until at least 2022 or 2023, so you fill that three year limit.

Chad: This is what the actual name of the legislation is for, it’s setting up people to make retirement savings a little easier. And this harkens back to some of the Richard Thaler research that we talked about in previous episodes of behavioral economics in the auto saving more for tomorrow [Episode 40]. Sometimes that alone can fight our inertia of not finding creative ways to use that money outside of saving it in our for retirement. Forty years down the road.

Mike: So one of the things we do here at Financial Symmetry, is we are advisers to 401K plans. And I’m pretty sure if you’re listening to a financial planning podcast, this is not you. But you’d be surprised how many people just fail to sign up for their 401k plan. Just like it’s in a way they don’t think about it. They get busy. Three or four years go by and they’ve contributed nothing to their savings. And so the auto-enrollment is just setting them up to begin with to put a better path.

401k Contribution Changes [16:05]

Chad: While we’re thinking about it and talking about it, the first of the year, a lot of people are focused on this concept. They looked at it in open enrollment, but not a bad idea to go in and pop your contributions up by 1% each year. That alone can help you to stair step to a better situation down the road. So maybe something to take a look at now.

Mike: That’s a great idea. The more you can save now, the less you have to work with, the more you can spend in the future. So that’s a big change. The last thing on small businesses be easier for employers to band together and provide a 401K plan. Right now, it’s typically employer by employer. There’s something called multiple employer retirement plans. MEP.

Mike: And that just the law is making it easier for them to work together to offer 401K plan to their employees. But that’s the big changes on the foreign case side.

Chad: So we are likely to see a lot of small businesses offering. Well, I can’t say a lot, we hope. Right. That’s why this is created, to make it easier and provide some incentives so small businesses can offer that retirement savings.

Non-Retirement Changes – 529 Accounts [17:01]

Mike: And there are some other non-retirement changes, which I think will be for some of the listeners to be helpful as well is if you have a 529 account, they now allow paying down up to $10,000 of qualified student debt would be a qualified expense or withdrawal from your 529 account. And that’s a lifetime limit per person. But just think about if you have extra 529 money and you have student loans still not paid off, you. You could pull money out the 529 to pay off the student loans.

Chad: Yes, this makes total sense.

Mike: Why is the limit $10,000? I don’t know. Why not unlimited? But that’s another topic. In the last non-retirement changes, the big ones that we highlighted was that there was an item called the kiddie tax. Prior to 2018, it was so people in high tax brackets could move investments to their kids to pay a lower tax on the gains in the interest and dividends on those investments. They had something called the kiddie tax where, what would happen is after a certain amount, a small amount, the money would then be taxed at their parent’s rate. So, with the 2017 tax law, they moved that to the trust tax rates. For those you that are experts in taxes, you’ll know that trust tax rates are much more condensed and much higher than the parent’s rates typically are. And so what they’ve done with this is they’ve reverted the kiddie tax back to the parent tax rates and away from the trust tax rates.

Chad: I wonder if there were a lot of complaints about that.

Mike: Probably a few, maybe some people that are in office, that were not happy with it, but that is a change from the 2017 tax bill. So those are some of the non-retirement changes that occurred with this, along with like we talked about the 401K. And then the IRS rules as well.

Chad: So then we move into the extenders.

Changes to Qualified Medical Deductions [18:46]

 Mike: Theses are always fun ones. These happen every year, probably around December. This is where they have something that was supposed to expire at the end of the year and they decide to extend it another year to really just keep everyone happy. The big one here is if you have a number of medical expenses every year. How it works is there’s an itemized deduction. But those expenses must exceed a certain percentage of your income to be deductible. And so the law was expected to revert back to 10% this year. But they’ve changed that number back to 7.5% for the next two years. So, in 2019 and 2020, if your qualified, medical expenses exceed 7.5% of your adjusted gross income, you can get a deduction for that.

Chad: And in essence, if you have large medical expenses, that might be from a long term-care situation or a chronic disease of some sort. And the treatment that you would need there. However, if you don’t have that and you just have some medical expenses, you really need mortgage interest, charitable deductions and your state and local income taxes to be above $24,000 dollars. Because that’s the standard deduction, maybe a little bit higher than that for retirees. You get a little extra there. But still that I mean, so it’s a it’s a high hurdle. But at the same time, it’s makes it a little bit easier for you maybe to get over the standard deduction and look at itemizing your deductions again.

Mike: Exactly. And then one other point of that. This is based upon when you pay for these expenses. It’s not when the bill shows up in the mail, it’s when actually you pay. And that’s check, cash, credit card. Something I learned when I did my additional study, continue education into the year. But it’s when the payment occurs, it’s not the actual bill received.

Chad: You just slid that right in there. A little continuing education.

Mike: Exactly. So keep that in mind (and this includes credit cards). If you at the end of the year you have a lot of medical expenses in one year, you could charge the credit card in December and that would be determined to be paid. But that’s going to be there’s some other extenders we won’t go through in detail. When I call extenders, I’m saying tax extenders, a temporary extended for another year or two. And we’ll provide links to more information on that. But we try to focus on what are the big picture items that most the people would be impacted by. There are some smaller items as well that are now in there as also.

Chad: So to summarize here, we went through these four areas and basically, we’ve had a lot of changes through the tax legislation that came through in late 2017. Right, with that tax bill. And we had a podcast on that where we walked through that, the detail there. But this one in particular, we if I’m thinking on the biggest impact, potential changes of this, the STRETCH IRA is one of the biggest changes that you would need to look at and how that affects your potential situation. And one example I can think of and we talked through was the idea. Say you’re a 60-year-old, right. And, you only have five years left of working years. Really you could argue this for any early retiree, right. If you know that you have a limited amount of income years left, then you could, with this new rule, wait to take potential distributions and then you’d have five years left after your five years of income that are going to be lower income years. And you could bring in that income from your IRA now that you’re not required to take out a withdrawal each year. But it does have to be in that 10-year time frame so it’s going to be it’s going to create some extra creativity around planning on the tax side of things which we love. We love tax planning here and finding those opportunities for people. And we’re never at a loss for wrinkles in new legislation that comes about and how we can find putting together that puzzle for you.

Mike: I think the key thing here is no laws is set in stone. I think the last few years for those that are always on social security, they may remember it. I think it was three or four years ago they changed it. Social security laws you couldn’t do with the file and suspend strategy a lot of folks implemented. And then obviously the tax changes that occurred the end of 2017 and now here the SECURE act at the end of 2019. So if you think everything is the way it’s going to be for the next 30, 40 years, you’re unfortunately going to be wrong. And so that’s why we do planning. We continue to update and review client situations for changes like this, that could impact or provide opportunities for them for their long term situation.

Chad: Because when life is busy and a piece of legislation comes through the pipe. You don’t know all of the opportunities and how it could really affect you in your daily life. So that’s what we’re focused on and making sure that you’re aware of that and that you at least aren’t or knowledgeable about it to say, hmm, maybe I don’t want to do that right now, but at least I have the knowledge of I’ve taken advantage of it.

Mike: Thanks, everyone, for listening. We appreciate you spending the time.

Chad: We have all our articles, still 500 or so on our website and we’re still creating YouTube videos to give you a different avenue if you’d rather watch, along with including detailed show notes. So check that out. And if you want to forward on to a friend, we always love that. But thank you for all the listening thus far, we’ll look forward to having a great 2020.

Announcer: This podcast is property of Financial Symmetry Incorporated. The hosts and guests of this show do not render or offer to render personalized investment or tax advice through this podcast. This production is for informational purposes only and does not constitute financial, tax, investment or legal advice. Listeners should consult with appropriate advisors for advice specific to your situation. Find out more about our advisors at www.financialsymmetry.com.

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