The 2019 calendar year closed out with lawmakers congratulating themselves on coming to an agreement on a bill unironically titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Yay!
The changes made by this new act are all adjustments to previous versions of similar laws. The government-approved retirement vehicles (401(k)s, IRAs, Roth IRAs, etc.) are still in place and the “benefits” are still questionable. The benefits to the retiree, that is. The benefits to Uncle Sam are set. Control of the capital and guarantee of the taxes generated by that capital are still in the hands of the US government and willing fund managers.
There are several impacts to this new law so let’s take them one at a time. This list may not be comprehensive, but we’ll hit the high/low lights.
The beginning age for taking Required Minimum Distributions (RMDs) from a 401(k) plan rises to 72 from 70.5. If you turn 70.5 after 2019, you’re in luck. The government will not force you to begin withdrawing your invested funds until you hit age 72. This can be classified as a good thing in so much as it increases the time you have, but I would argue that the change itself should not have been needed. What benefit is received by the retiree who is REQUIRED to withdraw a certain amount from their nest egg starting at an arbitrary age? Why was this part of the law in the first place? Why does it remain a part of the law, even if people have been granted an additional 18 months?
Owners of traditional IRAs are now allowed to contribute to them past the age of 70.5. Starting in 2020, even if you are older than 70.5, you may continue to contribute to a traditional IRA. This is a positive change because the arbitrary age limit has been repealed. For the time being, anyway. By the way, I looked up words other than ‘arbitrary’ to use in this paragraph and came up with ‘irrational’, ‘frivolous’, and ‘unreasonable’. All would have worked, but I stuck with the repeat. Moving on.
Annuities should become more prominent in 401(k) plan offerings. One very prominent fear among retirees is running out of money. Annuities can be complex and fee-laden in some cases, but they also provide the certainty of future cash flow. I prefer Participating Whole Life Insurance for the certainty, but occasionally annuities offer a good alternative. With the changes in the SECURE Act, employers will have more flexibility to add annuities to the 401(k) offering that will be portable when a person leaves that place of employment. Depending on the situation, the individual, and the annuity, this could be a positive change. More potential flexibility and cash flow certainty is a good thing.
Employers can automatically enroll employees to contribute up to 15 percent of income. I realize there are arguments on the psychology of saving that support this new ability for employers, but I’m wholeheartedly against it. The argument FOR states that more people would put money away for retirement if it were easier. Automatic is as easy as it gets, so surely more people will start putting money away without even realizing it. Fair enough. Enabling people to get out of their own way and ensure they save for the future is a great goal. My struggle is with the rules and fees associated with the 401(k) where the cash is automatically deferred. The money is still likely invested in mutual funds (fees) and will not be easily accessible, if at all, to the employee.
Change to non-spouse inherited IRA treatment. I am not a tax expert, but the brief rundown on this rule change shows that inherited IRAs not exempted by certain circumstances will need to be liquidated within 10 years. Specifically, IRAs inherited by children. So, inheriting assets in an IRA from deceased parents can potentially force the child into a higher tax bracket or, worse, force them to sell off assets at a loss. The latter situation may seem alarmist to anyone who did not suffer through the crash of 2008, but this is a very real fear for those of us who did.
So what does it all mean, Basil? First, just remember that the SECURE Act is not the last change you will see to the government-approved retirement “saving” rules. The regulations that were in place previously, as well as the updates just discussed, were not designed with the individual in mind. Mandating an age where a person must start liquidating any assets is designed to generate revenue through tax collection. While the motivations should not be a surprise, the important thing to focus on is that the rules can and do change. Participate in these government-approved plans with eyes open.
As I mentioned previously, I do recognize the power of making saving easier. Rather than settling for your employer automatically deferring part of your check to a 401(k), here is a relatively simple alternative. Open a new account with your bank and have your employer divert 10% of your pay to that account. In the beginning, make it difficult to see how much is in that account so you aren’t tempted to spend it. Give it three months and check two things: how much is in the account and how has your life changed? The likely answer is that there is more money in the account than you thought there would be and your life hasn’t changed dramatically. Many people say they didn’t even miss the money they set aside.
Once you are in this habit, or if you are already there, Participating Whole Life Insurance is the gold standard in building your financial foundation. Click here for more information on how to leverage the Perpetual Wealth Code and really feel SECURE.