retirement

How the SECURE Act Could Affect Retirement Plans

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 Touted as an aid to prevent Americans from outliving their assets, be aware of the downsides of this important pending legislation.

Provided by Angel McCall CFP®

In May 2019, the House of Representatives passed the SECURE act (Setting Every Community Up for Retirement Enhancement Act). Even though the bill contains provisions aimed at increasing access to tax-advantaged retirement accounts, your retirement accounts will be affected in a major way. Opponents point out that it is also a money-grab bill for the government by changing withdrawal rules which may impact retirement and estate planning strategies and a windfall for annuity vendors.

The Senate is expected to pass a version of the bill probably including key elements of their “RESA” (Retirement Enhancement Security Act) which would mitigate some of the “money-grabbing” aspects of the House bill.

While proposed legislation does smooth out some of the problems with retirement savings – like removing the IRA age limitation, expanding the start for RMDs, increasing annuity options and potentially increasing the likelihood of small employers starting retirement plans – there is still a strong argument that these changes, while positive, won’t help the retirement predicament very much. Many of the changes can be viewed as only benefiting wealth IRA owners who don’t need their RMDs yet and clearly benefit the insurance annuity product providers. The annuities provided do not seem to provide any inflation protection or benefits to beneficiaries. The biggest winners for these annuities will be the insurance companies and insurance sales people.

Americans will still be facing major issues not being addressed in Congress:

  • Social Security funding

  • Rising health care costs

  • Skyrocketing drug prices

  • Strains on Medicare and Medicaid, and

  • 1/3rd of the population are not really saving for retirement

Here are the major provisions of the SECURE Act that may affect you.

1.    Increase in the Required Minimum Distribution Ages

The current law requires minimum distributions (RMDs) from retirement accounts to begin once you reach 70.5. The SECURE Act sets the age at 70.5. The RESA Act proposes to change this requirement to age 75. One criticism  of this provision is that it mostly benefits those with significant savings allowing the money to grow longer.

2.    Removal of Age Limitation on IRA Contributions

Currently, IRA contributions are not allowed after age 70.5. The SECURE Act would remove this limitation for those who continue to work later in life.

3.    Penalty-Free Distributions for Birth of Child or Adoption

The rule would allow an aggregate amount of $5,000 to be withdrawn from a retirement plan without the 10% penalty within one year of final adoption or the child’s birth. (Income taxes would be owed.)

4.    Increase Small Employer Access to Retirement Plans

Currently, SIMPLE and SEP IRAs are available, but have not been broadly utilized. They could come together to set up and offer 401(k) plans at less cost than exists today.

Many employers offer no retirement savings options at all, leaving retirement savings solely up to the employee.

5.    Reduces the number of work hours required before signing up for a 401(k) plan

This will open up plans to part-time workers.

6.    Tax Credit for Automatic Enrollment

This credit to employers would help offset the costs of setting up a plan which includes automatic enrollment of all employees.

7.    Lifetime Income Disclosure for Define Contribution Plans

Would require that at least once a year the participant would receive a projection showing how much income the balance in the account could generate.

Of course, the methodology for calculating this and the assumptions used would need to be worked out and provided to the participants.

8.    Annuity Options Inside Retirement Plans

Included as a “safe harbor” provision, this will be a boon for insurance companies. For a variety of reasons, I almost never recommend that a retirement account be put into an annuity. Even though a 401(k) rolled into an IRA needs to be “managed,” it can provide cost of living increases and can be left to beneficiaries. Even though annuities provide a fixed, lifetime benefit, a person can usually do better without them.

9.  The Hidden Money Grab of the SECURE Bill 

If you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax-efficient manner after you die, then this provision could cost them dearly.

Non-spouse beneficiaries of IRAs and retirement plans currently can minimize the amount of their Required Minimum Distributions by “stretching” them over their lifetimes. The longer your beneficiaries can postpone or defer them (and taxes on the distributions) the better off they will be.

However, buried in the SECURE act is a small provision kills the “stretch IRA.” (This provision also applies to Roth IRAs -  these distributions are not taxable – but once the funds are rolled out of the Roth, their gains become taxable.)

Buried in the language of the SECURE Act, a beneficiary other than your spouse who inherits a traditional IRA or retirement plan must deplete the account within 10 years. This is a huge change from the old rules allowing withdrawals over a beneficiary’s lifetime.

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If you are thinking, “It can’t be all that bad,” then check out this chart demonstrating the difference between you leaving $1 million IRA to your child under the existing law, and the result under the SECURE Act.

A $1M Traditional IRA is inherited by a 45 year-old child and the minimum distributions he is required to take are invested in a brokerage account.

Assumptions used for Graph:

1.       $1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary

2.       7% rate of return on all assets

3.       Beneficiary’s salary $100,000

4.       Beneficiary’s annual expenses $90,000

5.       Beneficiary’s Social Security Income at age 67 $40,000

The only difference between these two is when the child pays taxes!

 The solid line represents a child who can defer (or “stretch”) the taxes over his lifetime under the current rules. At age 86, that beneficiary still has $2,000,000.

 The dashed line represents the same child if he is required to take withdrawals under the SECURE Act. Your child could be financially secure or broke at age 86!

 The Senate is working on a proposal that allows a $400,000 exclusion per beneficiary, but distribution would need to be over five years instead of ten years like the House version. The Senate version would allow more estate planning opportunities and tax savings, but this provision seems to be tied to Section 529 proposed revisions that the House voted down.

The SECURE act will impose massive taxes on families of IRA and retirement plan owners – even those with far less than $1M. Even though the Senate version has a five-year acceleration instead of a ten-year, this version could be better for most because of the value of the exclusion – especially if you have multiple beneficiaries.

Citations

1 - financial-planning.com/articles/house-votes-to-ease-rules-for-rias-correct-trump-tax-law [5/23/19]
2 - irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [6/18/19]
3 - congress.gov/bill/116th-congress/house-bill/1994 [6/17/19]
4 - shrm.org/resourcesandtools/hr-topics/benefits/pages/house-passes-secure-act-to-ease-401k-compliance-and-promote-savings.aspx
5 - law.com/newyorklawjournal/2019/04/05/what-to-know-about-the-2-big-retirement-bills-in-congress/ [4/5/19]
6 – forbes.com/sites/jlange/2019/06/11/the-hidden-money-grab-in-the-secure-act/#66b95993bbd7

 

The Case for Women Working Past 65

The Case for Women Working Past 65

The median retirement age for an American woman is 62. The Federal Reserve says so in its most recent Survey of Household Economics and Decisionmaking (2017). Sixty-two, of course, is the age when seniors first become eligible for Social Security retirement benefits. This factoid seems to convey a message: a fair amount of American women are retiring and claiming Social Security as soon as they can.1

What if more women worked into their mid-sixties? Could that benefit them, financially? While health issues and caregiving demands sometimes force women to retire early, it appears many women are willing to stay on the job longer. Fifty-three percent of the women surveyed in a new Transamerica Center for Retirement Studies poll on retirement said that they planned to work past age 65.2

Staying in the workforce longer may improve a woman’s retirement prospects. If that seems paradoxical, consider the following positives that could result from working past 65.


A Retirement Gender Gap

A Retirement Gender Gap

What is the retirement outlook for the average fifty-something working woman? ​As a generalization, less sunny than that of a man in her age group. Most middle-class retirees get their income from three sources. An influential 2016 National Institute on Retirement Security study called them the “three-legged stool” of retirement. Social Security provides some of that income, retirement account distributions some more, and pensions complement those two sources for a fortunate few.1 For many retirees today, that “three-legged stool” may appear broken or wobbly. Pension income may be non-existent, and retirement accounts too small to provide sufficient financial support. The problem is even more pronounced for women because of a few factors.

Beware of Emotions Affecting Your Money Decisions

Beware of Emotions Affecting Your Money Decisions

When emotions and money intersect, the effects can be financially injurious. Emotions can cause us to overreact – or not act at all when we should.  

Think of the investors who always respond to sudden Wall Street volatility. That emotional response may not be warranted, and they may come to regret it.

Trump has signed an order that could roll back a rule intended to protect Main Street's retirement money!

Rachel Levy – Business Insider – Feb. 3, 2017

Your Retirement is at Stake!

President Donald Trump has signed an executive order on the Obama administration's landmark retirement savings rule, setting in motion a potential repeal of a recently passed standard that would have made it harder for financial advisers to give conflicted advice.

The so-called fiduciary rule, which is slated to go into effect in April and will likely now be delayed, requires advisers to put their clients' interests ahead of theirs. The rule has long drawn rebuke from Wall Streeters and some of those who are close to Trump.

Massachusetts Sen. Elizabeth Warren took aim at the executive order, saying it would "make it easier for investment advisers to cheat you out of your retirement savings."

Nancy LeaMond, executive vice president at AARP, a nonprofit representing retirees with nearly 38 million members, said in a statement, "For many Americans, today's executive order means they will continue to get conflicted financial advice that costs more and reduces what they are able to save for retirement."

What's the fiduciary rule?

It's a simple enough concept: A financial adviser should be legally required to put their clients' best interests ahead of their own.

But it's actually not the law. The Department of Labor — which concerns itself with such matters because of its oversight of workers' welfare and retirement — decided last year to change that by establishing the fiduciary rule over retirement accounts. That drew rebukes from Wall Street lobbyists and one of Trump's most flamboyant backers, financier Anthony Scaramucci.

The fiduciary rule was set to take effect in April 2017. Its specific requirement is that financial advisers — who can be paid referral fees by asset managers for directing client money into their funds — must put their clients' interests ahead of theirs.

Currently, brokers, financial advisers, and other finance professionals don't legally have to act in a client's best interest, with few exceptions, such as those who are registered as investment advisers with the Securities and Exchange Commission or in individual states. Those who are registered in this way often advertise it — it's seen as good business.

Those who aren't registered, like brokers, just have to prove that the investment is suitable, not necessarily the best option, for their client — no matter that that fund might be more expensive and provide a better commission for the adviser.

"It's kind of like if you let doctors be part of the drug companies directly and prescribe their own medicine," Blaine Aikin, executive chairman of fi360, a fiduciary consultancy in Pittsburgh, told Business Insider last year. "Unfortunately, we have a system where we've not established clarity between the sales side of financial services and the profession of financial advice."

A summary of the kinds of conflicted payments advisers can receive, according to an Obama White House report. Obama administration

The conflicts of interest inherent in using advisers who aren't serving in clients' best interests may go unnoticed by those who use them and are unaware they are signing into a conflicted relationship.

Conflicted advice costs retirement savers about $17 billion a year, according to a 2015 report from the Obama administration. Despite objections, the administration pushed ahead with a rule change in April 2016, giving fund managers a year to figure out how they would comply.

Advisers could still receive commissions under the new rule, but they have to provide a contract promising to put a client's interests first — the "best-interest contract exemption" — and receive no more than reasonable compensation. Firms would also have to clearly disclose all their compensation and incentive arrangements.

Wall Street firms worried about this exemption because it opens them up to litigation if their clients believe their advisers have not acted in their best interest. "Retirement investors will have a way to hold them accountable," the Labor Department says.

To be clear, this rule applies only to retirement accounts like 401(k)s and individual retirement accounts, not to regular taxable accounts, with which advisers can rely on the weaker suitability standard. Still, there's big money at stake. Americans invest $7 trillion in 401(k)s and $7.8 trillion in IRAs, according to the industry's lobby group, ICI.

Wall Street's rebuke

Anthony Scaramucci. Hollis Johnson

When it was first raised, the rule prompted rebuttals from the financial industry. Some argued that they would face increased compliance costs and that those costs would price out smaller brokers who wouldn't be able to service smaller accounts.

Scaramucci, now one of Trump's advisers, has been one of the rule's most vocal critics. He also had a lot at stake. SkyBridge Capital, a fund-of-hedge-funds he founded and recently sold, would likely have been hurt by the rule since the firm oversees retirement money, and gets a bulk of its assets via financial advisers at banks.

The fiduciary rule could put this very model of using a bank's army of financial advisers as a sales force for hedge funds at risk, especially at funds-of-funds that often end up in retirement accounts, industry lawyers previously told Business Insider.

Wall Street firms have also been fearful of another secondary effect that would hit them where they are already hurting.

Do You Need Longterm Care Insurance?

Like estate planning, long-term care insurance is a critical component of a financially secure future, but many people tend to put it off or actively avoid it. Planning ahead helps you avoid burdening your family and loved ones with the mental and financial costs of providing care. Read on for more about adding a long-term care policy to your overall wealth portfolio and what to consider along the way.

Do Women Face Greater Retirement Challenges Than Men?

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings.

Focus on the Forest, Not the Trees

It's a message worth repeating. Investing is a matter of focus. Despite recent disappointments in stock market performance, investors who are willing to assess the whole universe of investment choices may find that the market continues to offer new possibilities. And those who keep their sights set on long-term investment goals may find that a "forest, not trees" approach to investing offers the greatest potential for success.