We've all heard the troubling statistics about Americans not saving enough for retirement. According to the Government Accountability Office, a whopping 48% of Households over the age of 55 have no retirement savings at all!1 It's no wonder that according to a 2018 Gallop poll 46% of Americans not yet retired are worried they won't be able to live comfortably in retirement.2 Not surprisingly, this is a top concern for congress as well. In case you haven't heard, a new bill has passed through the House of Representatives called the SECURE Act (Setting Every Community Up For Retirement Enhancement). The Act attempts to tackle parts of the retirement savings crisis. Like most bills that come out of Congress, there are good parts and bad. How will this impact you? Here are the top things we think you should know about this bill.
1) Small Employer Plan Relief
Small businesses make up a substantial portion of U.S. employment. The trouble with numerous small businesses is that many times they struggle to provide retirement savings plans to employees due to the costs associated with them. However, the SECURE Act will allow the creation of pooled retirement plans. This means small businesses can group together to offer a retirement plan, but at a lower cost. The act also proposes providing a tax credit to businesses creating new plans to help offset some of the costs. Ideally this means that more small business will offer retirement plans, and thus, more Americans can start saving in these tax-preferential vehicles.
2) Increased the Age for Required Distributions
Many retirees have been warned of the magical age of 70.5 when mandatory distributions from their pre-tax retirement savings start (technically the year after turning 70.5). Many retirees find that they don't quite need the money yet, but are forced to begin withdrawals, and thus, become taxed on the income. The new law aims to increase this age to 72. This is beneficial for two reasons. First, 72 is a much easier age to remember than 70.5 (honestly, who counts half birthdays after the age of 10?). Secondly, this postpones when money needs to be taken out of these accounts.
Along with this, people are now allowed to saving in Traditional (pre-tax) IRAs after 70.5 and for as long as they are earning income. Therefore, those who are still working can stash money away for retirement longer if they so choose, and especially if they are behind on their retirement savings. ROTH IRA contributions past 70.5 are currently allowed and will continue to be.
3) More Penalty Free Withdrawal Options
While money set aside in retirement accounts is ideally left in the account until retirement, life circumstances may require earlier distributions. This is especially true for younger individuals who experience big life-changing financial decisions in a relatively short time after graduating college (buying a home, getting married, paying student loans, having children, aging parents, etc.). There are already exceptions for allowing IRA owners to withdraw money from their accounts without penalty for certain situations such as a first time home purchase, or for a disability. The SECURE Act includes new penalty waivers for certain adoption and child birth expenses. While we financial advisors hope that young people won't need to touch their retirement savings for this, at the very least, we're hopeful it will encourage young people to start their retirement savings sooner knowing they can take some money out for starting a family if needed.
The Not So Great:
1) Be Apprehensive About Annuities
It has long been said in the financial advisor community that annuities are not bought, they're sold. Unfortunately, the SECURE Act makes it much easier to turn your workplace retirement plan into an annuity. We're not saying that all annuities are bad, or that you shouldn't consider them in your retirement plan. Our concerns as fiduciary advisors is that in many circumstances, annuities don't provide the income security that they are advertised to. Specifically, while they are designed to provide lifetime income, that income generally does not increase with inflation. What that means is that the income you get today, won't buy you the same amount of stuff (medical care, groceries, entertainment, etc.) 10, 20, or 30 years from now. There is also the risk that the insurance company you purchase the annuity from won't be able to make the promised payments for the lifetime of the annuitant. If the insurance company experiences financial difficulties and can't meet their obligations, their policy holders can be seriously impacted.
Annuities can be a useful tool in your retirement planning tool-box. But as financial advisors, we would caution consumers from turning all, or a part of their retirement savings into one before seriously considering the implications, alternatives, and how this fits into your overall financial plan.
2) Less Time to Close Inherited IRAs
As financial planners, one of our favorite planning techniques was the utilization of the stretch-IRA. Essentially this is when someone inherits an IRA from their parents (or other individual) and are allowed to take withdrawals from the account over their lifetime. This is great with pre-tax IRA because the mandatory annual withdrawals would be stretched over a longer period of time and have less of a tax impact each year. It was even better for inherited Roth IRAs because the tax-free growth in the Roth could be stretched out over the lifetime of the beneficiary.
Unfortunately, this planning technique is likely to go away with the new law. The SECURE Act proposes mandating these accounts be emptied, at the latest, 10-years after the original owner's death. These accounts will not be able to be held for the course of the inherited person's lifetime. There are exemptions for a decedent's spouse, if the inheritor is disabled, for minor children, or for individuals less than 10 years younger than the decedent. While we're sad to see the rule go, as financial advisors, we are already considering the estate planning ramifications for our clients, and those inheriting these accounts, in the years to come.
Like most new laws, with so many competing interests, there are good parts and bad. The SECURE Act is no exception. While we are excited for some of the changes that are likely to come, there are other portions that worry us. For more information on the SECURE ACT, you can read a summary of the bill here. The Senate has a similar bill in the works called RESA or the Retirement Enhancement and Savings Act. Congress will have to reconcile the two bills before the final bill can become law. For how these changes may impact you, and your retirement plan, we suggest that you reach out to your financial advisor for guidance and support.