In May 2019, the U.S. House of Representatives overwhelmingly passed the Secure Act of 2019. In December, it was also passed in the Senate. This legislation, which is more formally known as the Setting Every Community Up for Retirement Enhancement Act of 2019, is very similar to another piece of legislation, the Retirement Enhancement and Savings Act, or RESA.
The primary purpose of both of these bills is to encourage more companies to offer workers a retirement savings plan. Doing so could provide employees with a way to defer their contributions, as well as to accumulate tax-deferred gains in their accounts.
This, in turn, could encourage workers to set aside money for the future. It could also help to increase the number of Americans who contribute to an employer-sponsored retirement plan, which currently stands at only about half.
Following the President’s signature, and if it is passed as law, the SECURE Act could ultimately have a positive impact on the financial security of millions of Americans. But it may not be all wine and roses for consumers or their advisors.
What Your Advisor Must Know About the 2019 SECURE Act
As you are likely well aware – particularly if your financial advisor has been in the industry for many years – working as an insurance or financial advisor can sometimes be akin to walking through a minefield in terms of earning a living while at the same time staying compliant and providing the financial tools that will best fit their clients’ specific needs.
With that in mind, here are ten things that your financial and insurance advisor must know about the SECURE Act of 2019:
1) Tax Credit Increase
Through the SECURE Act, small businesses can attain some real incentives for setting up a company retirement plan – starting with a tax credit of up to $5,000 on the plan’s start-up costs (as well as the opportunity for an additional $500 tax credit for up to the next three years).
2) Cost-Sharing of Multiple Employer-Sponsored Retirement Plans
If a small business starts a retirement plan for its employees, it may be allowed to share in the costs of administering that plan with other businesses – even if the companies are unrelated.
3) Retirement Plans for Part-Time Employees
For many years, it has been required that only full-time employees be allowed to take part in a company-provided retirement plan. But the SECURE Act could change that by opening up participation to employees who have worked at least 500 hours per year (as versus 1,000) for the past three consecutive years.
4) Delayed Required Minimum Distribution Date
Upon reaching age 70 ½, those who are invested in traditional IRAs and qualified retirement plans have been required to start taking withdrawals (or be penalized by the IRS if they don’t). The SECURE Act would raise the age to 72.
5) Increased Age for Contributing to Traditional IRAs
Similarly, rather than having to stop making contributions to traditional IRAs at the age of 70 ½, the SECURE Act would allow investors to continue making contributions to these plans.
6) Lifetime Income Offerings from Employers
With people living longer these days, retirement income has become even more of a concern. With that in mind, the SECURE Act would include several provisions encouraging employers to offer annuities and other income options in their retirement plans. Further, the Act would also require the plan sponsor to provide an estimate of the monthly income a participant could receive with the plan(s) they choose.
7) Elimination of the “Stretch” IRA
Currently, when an IRA account is inherited by a non-spousal beneficiary, the tax-deferred status of the account may remain in-tact. With the passage of the SECURE Act, though, “stretch” IRAs would be eliminated.
8) Conversion to Roth IRAs
Many investors have opted to convert some or all of their tax-deferred retirement savings over to a Roth IRA. This would allow for tax-free distributions (although a Roth conversion does constitute a taxable event at the time the funds are converted). While the SECURE Act will not impact Roth IRA conversions, it would require withdrawal within ten years on inherited Roth IRAs – and this could negatively impact the tax-free growth potential of the Roth account.
9) Use of Life Insurance as a Retirement Income Tool
In cases where beneficiaries may lose some of the tax-related benefits of a Roth IRA, life insurance could help to make up for it. Using this vehicle – in which the proceeds are inherited income tax-free by the beneficiary – the original owner of the Roth IRA could withdraw more from that account, and still leave a tax-advantaged asset (life insurance proceeds) to their survivor(s).
10) Review of IRA and Charitable Remainder Trusts
For higher net worth investors, trusts are oftentimes used for tax-efficient asset transfer. Following the passage of the SECURE Act, though, IRA trusts should be reviewed in terms of whether or not they still make sense – particularly given the elimination of the stretch IRA. In some cases, naming a charitable remainder trust (CRT) as the beneficiary of retirement assets could make more sense.
How Not to Worry About Having Income in Retirement
In nearly all economic environments, one of the biggest worries on the minds of retirees is running out of money before they “run out of time.” Even with the passage of the SECURE Act, investors will still need guidance when choosing the plan(s) and the financial products that are right for them and their specific needs.
At Annuity Gator, our focus is on educating consumers and advisors about how annuities work, and how they can provide both tax and income-related benefits. So, if you have questions about annuities and lifetime income, we’re here for you.