You’re getting older. Yes, it’s true and you cannot hide from this fact any longer.
Getting older means that you are either closer to retirement, or already in it. Advancing in age comes with its benefits; oftentimes age brings wisdom (or at least connotes it), sometimes aging can mean greater financial stability, but one thing that always came with advanced age was the expectation that much of your retirement plan assets would require liquidation over your lifetime beginning in the year that you reach age 70½.
And do you remember that pesky law that disallowed those over age 70½ from saving into IRAs though they might still be working?
Maybe your employees have been pining for access to the stable income that their parents had in their pensions, but you’ve been unable to provide that in their 401k plans?
Or, as a small business, have you ever been irked by the higher cost you are expected to pay, relative to some larger employers, just to start a 401k plan?
Perhaps your family’s strategy to leave assets to the next generation was to maintain as much as possible in IRA assets to preserve tax benefits for children using a stretch IRA?
Oh, how the times (and your retirement plans) have suddenly changed.
The SECURE Act
On Dec. 20, the Setting Every Community up for Retirement Enhancement, or the SECURE Act, was signed into law. Depending on how you’ve strategized your own plans for retirement, the provisions in this new law may serve to support your plan or they may entirely upend it.
Some key components of the law include:
- After age 70½ you can now save into an IRA as long as you are still working. Under the previous rules you could not.
- Required Minimum Distributions (RMDs) must now begin at age 72 and not, as according to previous law, at age 70½.
- Employer sponsored 401k plans may now add annuities as investment options for participants.
- Small businesses may now work together for the purpose of creating scale and sharing costs by joining other companies’ 401k plans.
- 529 plans can now be used to pay down as much as $10,000 in student loan debt, even for siblings.
- Goodbye, stretch IRA.
Forget the Stretch
Many of those baby boomers who refuse to retire from the workforce will cheer the opportunity to continue to defer savings to IRAs while they are working, but the IRS has a plan to make up those additional years of deferred (or lost) tax revenue.
The “stretch IRA” has historically represented a considerable opportunity to leave tax-deferred assets to future generations of beneficiaries while preserving the tax benefits for many more years, but after the passage of the SECURE act, the “stretch IRA” has lost some of its elasticity.
Of course, IRA and 401k investors can still choose to leave those assets to younger beneficiaries, but what had often been a lifetime distribution requirement based on the beneficiary’s age has become a requirement that all assets be fully distributed within 10 years of the IRA owner’s death.
Distributions from Traditional 401ks and IRAs means taxable income, and by some calculations this provision of the new law is expected to raise almost $16 billion for the U.S. Treasury.
Never Stop Saving
While the Required Minimum Distribution age has increased by 18 months, from the confusing age of 70½ to a clearer 72 years, the opportunity to defer those distributions is compounded by a provision of the new law that allows greater flexibility for tax deferral and IRA savings later in life.
What had been a hard-stop to IRA savings after age 70½ has now been removed thus allowing those at any advanced age who still have earned income to continue to defer some to IRA accounts. For some folks who fall below the income limits or don’t have access to work-sponsored retirement plans, they may still be able to take tax deductions for the savings they make into their IRAs.
This means that for 2020 an income earner with a spouse may be able to save up to $14,000 into IRAs for the year, even if both are over age 70½, and even if the spouse has no earned income (using a spousal IRA).
If these savers are over age 72; however, they will still have to take the minimum distributions the new law requires while they are saving. This could be expected to mitigate some of the tax benefit of the later-age savings, but it likely won’t entirely eliminate it.
More To Come
There remains much to unpack in the SECURE act, and in future columns I will tackle some of the additional changes that impact individual savers as well as those provisions that most impact business owners and employer-sponsored plans.
As always, find a qualified Certified Financial Planner and an experienced estate planning attorney to help you navigate the ways in which the SECURE act will impact your retirement and estate plans.
Anthony M. Conte is a certified financial planner and managing partner at Conte Wealth Advisors with office in Camp Hill, Pa., and Fort Myers, Fla. He can be reached at email@example.com.