We just might get a SECURE Act after all
Just 6 short months ago, I wrote up a recap of the so-called SECURE Act, which would entail various small changes to how we approach retirement. Some of these changes are good, and some are not good, and most are not going to make much difference at all in actually SECURING people’s retirement anyway. While the House of Representatives passed it overwhelmingly back then, and it was expected to pass the Senate and be signed into law quickly, it stayed stuck in legislative limbo instead. Now though, it has been attached to a 2020 spending bill that must pass this week, and chances are good that it will indeed become law. Here are some provisions that are most likely to affect you, if not right away:
Retirement Account RMD Age Change
If we have worked together, I’ve probably illustrated how your retirement distributions would look: trying to predict the future value of your current retirement assets (pre-tax IRAs and employer plans) and the contributions you’ll continue to make over time, then showing you how much you will be required to withdraw from those accounts and when. That calculation is based on the current rules, of distributions being required to start the year you turn 70 1/2, and based on the IRS table correlating to your age that year. As I explained how it all works, I mentioned that it will likely change from 70 1/2, particularly for the younger savers who tend to be my clients. And now we can be reasonably certain that requiring starting age will move up to 72.
It won’t affect those already taking distributions, and as before, you can begin withdrawing your assets without penalty at age 59 1/2 - but also as before, any amount you withdraw will be taxable to you that year. Still, this will help those who want to delay those distributions as long as possible, either because they’re still working, or because they are trying to manage income, or because they’ve retired and have other sources of funding to meet expenses (and in this last case, it gives us the opportunity of a few more years of Roth conversions that will further reduce taxable income in retirement).
An important side note: the table itself is changing, and that’s separate from the SECURE Act. Meaning, the schedule of factors used to calculate distributions will be adjusted slightly to reflect changing life expectancy. That will apply to everyone, whether they are currently taking distributions or not, and will lower everyone’s required minimum distributions (and therefore, taxes owed) a little.
Inherited IRA Distribution Rule Change
There are some particular rules that govern what happens when you inherit someone’s retirement assets (those IRA or employer plan dollars that remained in the account at their death). If you’re their spouse, the rules are much simpler and much more lenient, and that’s not changing.
But for everyone else, it can be tricky to navigate: it’s not your retirement money, and you generally can’t let it sit untouched but growing until you retire. Your options now are to take the entire distribution right away, distribute the account over 5 years, or distribute the account over your life expectancy. This last option is colloquially known as the stretch option, and it tended to produce the best long-term results, in particular for younger heirs because it allowed more of the assets to remain invested for longer. Which option is best depends on your age (the younger you are, the less you will be required to take out and pay tax on each year), how much money is in question, and your current and future expected tax brackets.
Now though, that will change for those inheriting these assets beginning in 2020. For the most part, non-spouse heirs will have 10 years to empty the account, at whatever schedule they choose. So no required minimum distributions over those first 9 years after inheriting. This presents a planning opportunity for some who might be anticipating some low-income years (someone chooses an extended unpaid childcare leave, someone goes back to graduate school, etc) - the account can be emptied while your tax brackets are low. But overall, this means a loss of the ability to let the assets grow. There are some exceptions to this rule, and again it’s not retroactive - if you’ve already begun distributing you’re grandfathered in and can continue as before. It will also mean changes to how beneficiaries are named, since there’s less benefit to leaving assets to the very young.
Multiple Employer Plans
These plans, which allow multiple unrelated employers to band together to offer a common retirement plan to their employees, already exist. But some key problems limited their usefulness. This legislation removes those barriers, which in theory should allow them to be more widely offered. So if you have a small business, or are self-employed, prepare so see this come up a lot more in discussions with your advisor (and in the marketing directed at you).
Annuities in your employer plan
This is another topic I wrote about. Annuities have their place in a retirement plan, but choosing an expensive one inside an employer plan, particularly if you have a long way to go before you need the money, is unlikely to improve your retirement outlook.
There are other changes and provisions which will affect a smaller subset of you, relating to using 529 assets for student loans and how long you can continue to contribute to a traditional IRA, among others. Not all of the rule changes will take effect at the same time. The best course of action will be specific to your circumstances so make sure you understand how it all affects you, and what changes you need to make to your plans to take the new rules into account.