SECURE/RESA Passed Congress: Now What?Submitted by Bernhardt Wealth Management on January 6th, 2020
As we noted here previously, since late last spring, Congress has been considering significant updates to the laws governing certain retirement plans. That process finally came to fruition late last month, as the full Congress voted to enact the Setting Every Community Up for Retirement Security (SECURE) Act, which was signed into law by President Trump on December 21, along with the rest of the large year-end spending bill. Passage of this legislation has been greeted by overwhelmingly positive reviews from financial industry professionals and advocates, including representatives of the insurance industry, employer benefit organizations, financial services leaders, and others.
The full text of the appropriations bill makes for rather dull reading, but the main points of the bipartisan SECURE Act impacting most Americans include
- extending the age to begin receiving required minimum distributions (RMDs) from qualified retirement plans from 70 ½ to 72;
- allowing those older than 70 ½ with earned income to contribute to IRAs;
- incentivizing small businesses to collaborate in offering employer-sponsored retirement plans to their employees;
- increasing legal protections to employers who offer annuities as part of their retirement plans;
- expanding availability of employer-sponsored retirement plans to part-time workers;
- permitting the use of 529 plans to repay student debt.
A summary document is available from the House Ways and Means Committee that lists these and other salient aspects of the legislation. Generally, the SECURE Act is welcome news, as its provisions are primarily aimed at providing greater incentives for and access to tax-qualified savings plans for many Americans who previously didn’t have either. As we have stated before, anything that encourages higher rates of savings for retirement and other long-range purposes should be applauded.
But there are a few provisions of the new law that are concerning to many in the financial planning industry. First, the SECURE Act eliminates the so-called “stretch provision” for non-spousal beneficiaries of retirement plans, including IRAs. Formerly, the time period for taking full distribution of such accounts when received as a plan beneficiary was the expected lifetime of the beneficiary. In other words, a grandparent could name a grandchild as beneficiary of an IRA account, and in the event of the grandparent’s death, the grandchild could stretch receipt of the account proceeds over their lifetime, thus limiting the yearly tax liability for the income from the proceeds. Now, however, unless the beneficiary is a spouse, proceeds must be distributed over 10 years or less. For many clients with significant assets in qualified retirement plans, this will create an urgent need to review estate planning strategies and beneficiary designations. It is important to repeat that this provision does not apply to spousal beneficiaries, who may still extend distribution of retirement account proceeds over their lifetimes. Further, non-spousal beneficiaries who have already received such proceeds are grandfathered (sorry for the pun); they are not subject to the new requirement. However, taxpayers who have utilized trusts as beneficiaries of retirement plans may need to review their plan documents in light of the new legislation. Taxpayers with high balances in traditional retirement accounts may also wish to consider Roth conversions, especially if plan beneficiaries include non-spouses and balances are high enough that the 10-year liquidation requirement seems likely to throw the beneficiaries into a higher tax bracket than the current taxpayer occupies. In other words, it may be advantageous for the estate as a whole to convert to a Roth account and pay the taxes now, affording the beneficiaries tax advantages on the income when it is distributed.
Another concern for some is the current scarcity of advisory infrastructure for small businesses related to setting up and administering collective multiple-employer plans (MEPs). Some observers believe that many small businesses may be reluctant to enter into MEPs, despite the greater incentives and safeguards included in the legislation. They have traditionally perceived employer-sponsored plans as complicated, risky, and fraught with liability. Thus, the retirement plan industry, financial planning professionals, and perhaps even legislators will need to be attentive to ways of encouraging and facilitating small business acceptance and usage.
If you have questions about how this new legislation could affect your retirement accounts, your estate planning, or your business, we are here to help you find the facts you need. Whether you are considering a change in how your accounts are structured or the benefits and liabilities of offering a plan to your valued employees, our professional, fiduciary advisers can give you impartial, comprehensive counsel based on meticulous research.