Written by: Dennis McNamara
Congress just passed a year-end bill known as the SECURE Act (i.e. Setting Every Community Up for Retirement Enhancement Act of 2019). While the name suggests both promise and opportunity in solving our nation’s retirement crisis, we at wHealth Advisors dug into the weeds and wanted to use our last blog post of 2019 to share some thoughts.
Let’s start with the GOOD:
- Retirement deductions for those over 70.5 years old: For those who have earned income and happen to be over age 70.5, you can now contribute to an IRA.
- Required minimum distributions bumped back from 70.5 to 72: For those who are not yet 72, required minimum distributions from qualified retirement accounts will now begin at 72 rather than 70.5.
- Multiple Employer Retirement Plans: Allows two or more unrelated employers to join a pooled employer retirement plan (Dental and Medical practice owners/partners: This is for you!). These plans will need to be administered by a Registered Investment Advisor firm (like wHealth Advisors). If done correctly, this provision can create significant savings for both owners and participating employees.
- Kiddie tax rates: Unearned income for a child under 18, or under 24 and a full-time student, to now be taxed at the parent’s marginal tax rate (as opposed to the previous trust tax rates which in most cases were higher than the parent’s tax rates).
- 529 plan expansion of qualified expenses: Allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.
And now the BAD:
- No more “stretch IRAs” for inherited retirement accounts: Before the SECURE Act, if you passed away and left a qualified retirement plan to your descendants (think: 401k, IRA, 403b etc.), the beneficiaries could take distributions from the inherited account over their own personal life expectancy (calculated by IRS). For example, suppose a 30 year old inherited an IRA from their parent. That 30 year old was previously able to take annual, piecemeal distributions and “stretch” the distributions from the qualified account until their death. After the SECURE Act, non-spouse inheritors of qualified retirement accounts must now have the funds distributed within 10 years of inheriting (note: this change begins for accounts inherited in 2020).
- This is extremely detrimental to the average investor. REASON: Forces larger income distributions to beneficiaries even if the income is not needed. This will not only minimize the tax deferral benefits (having to take the money sooner prevents the funds from having a longer time horizon to grow tax free) but will also trigger many investors to be bumped into higher tax brackets. From a behavioral standpoint, forcing distributions over a 10 year period will likely result in more folks squandering inherited retirement accounts (thus giving annuity reps another mouth-watering opportunity to sell annuity products).
- Employer retirement plans can offer “Lifetime Income Providers”: TRANSLATION – annuity companies and their advisors can now place more of their high-cost annuity products into employer retirement plans. Additionally, and according to the SECURE Act, there is no requirement for a fiduciary to select the least expensive option.
OTHER provisions worth noting:
- In 2021 the IRS will make slight tweaks to it’s life expectancy tables (which will impact required minimum distributions). A small change but a positive one.
- Increased tax credit for employers starting a retirement plan and for employers that setup a plan with auto-enrollment (again, a nice perk for the Dental/Medical practice owners!).
- Penalty-free withdrawal (up to $5k) from retirement plans for individuals in case of birth of a child or adoption.
- Federal medical expense deduction reduced to 7.5% of AGI (down from 10%).
As is often the case, what legislation gives with one hand it takes with the other. While we’re happy with some of the improvements, the most impactful changes (elimination of stretch IRAs, annuities in 401k plans) make it clear that the real winner of the SECURE Act is the insurance lobby.
For any questions or clarifications please feel free to contact us hello@whealthfa.com.
