January 19, 2020
How Will the SECURE Act Affect Your Retirement Plan?
We can help you make sense of the SECURE Act — and avoid nasty surprises at tax time or during major life events. Contact the Dowling Group today to discuss the strategies that make the most sense for your situation. Please call 203‑967‑2231 or email us to request a consultation.
The Setting Every Community Up for Retirement Enhancement Act of 2019—the SECURE Act—was passed by Congress and signed by President Trump in the days leading up to Christmas. The new rules, which many consider the most significant overhaul to retirement planning since 2006, became effective almost immediately, on January 1, 2020.
Incorporated into a broader appropriations bill, the SECURE Act is aimed at helping Americans more easily participate in tax-advantaged retirement accounts as well as helping ensure that older retirees do not outlive their assets. But there are also changes that will have negative consequences to some of the most typical retirement planning strategies.
The Problem: Most Americans’ Retirement Savings Aren’t Where They Should Be
The challenges faced by our retirement system are well documented, from worries about Social Security’s reliability to the fact that most of us just don’t save enough for retirement.
According to the Bureau of Labor Statistics, just more than half of American adults (55%) even participate in a workplace retirement plan, like a 401(k). And the ones who do participate are usually significantly underfunded; Vanguard announced earlier this year that its research showed that those 65 years and older had median 401(k) balances of less than $60,000.
The SECURE Act was designed to address these concerns by encouraging more employers to offer retirement plans by lowering costs and reducing some of the risks.
Key Benefits of the SECURE Act
While the SECURE Act contains 29 provisions aimed at helping us better save for retirement, here are a few of the highlights:
- It offers tax incentives to small businesses to set up automatic enrollment in retirement plans
- It allows employers to join with other companies and offer joint-retirement plans, which should help keep costs down
- It allows many part-time workers to participate in employer-sponsored retirement plans
- It creates a new early withdrawal penalty tax exemption of up to $5,000 from an IRA to use for childcare costs
- It pushes back the Required Minimum Distribution Age from 70½ to 72
- It allows for the inclusion of more lifetime- income options, including annuities
But There Are Some Major Concerns…
While many are suggesting that the SECURE Act is the biggest overhaul to retirement planning since the Pension Act of 2006, there are a few provisions giving financial advisors pause.
Annuities: The SECURE Act creates new rules that will expand the lifetime-income options – including annuities – within retirement plans. But investors would be wise to think more than twice before buying an annuity within their retirement plan.
For one thing, the costs of annuities are generally high. But perhaps more worrisome than the high costs is that the trustees of your retirement plan will not have the same fiduciary duty when they select annuity providers. While they will still have fiduciary responsibility for selecting the mutual funds in the plan, the SECURE Act only requires the trustees to collect the insurance company information, not perform any real due diligence. And that could present some challenges down the road for employees.
Tax Increase? Many financial advisors are warning that certain provisions of the SECURE Act will result in a tax increase for some. And the truth is, that will happen. It will happen because one of the main parts of the SECURE Act changes the “stretch” tax provisions that allows inherited IRAs to be stretched out over the lives of multiple beneficiaries.
So, going forward, the tax increase won’t come from the account holders directly, but will impact those who inherit retirement accounts, because the tax bill will be paid by those future heirs when they withdraw money out of inherited retirement accounts over a now-condensed 10-year period.
Pay Attention to the RMD Rule, Too
Retirees close to the Required-Minimum-Distribution Age need to be careful too. If you turned 70½ in 2019 you will still have to take an RMD by April 1, 2020, and another RMD by the end of 2020. And for those who turned 70½ in 2019, failing to take your RMD will result in a big penalty – possibly up to a 50% tax on the amount not distributed as required. If on the other hand, you turn age 70½ in 2020 or later, you don’t have to start taking RMDs until age 72.
The Bottom Line: Connect With Your Advisor to Update Your Plan Now
The SECURE Act changes a lot of the rules surrounding retirement plans, and while many of them are simple, others are very complex.
As seasoned tax experts and financial planners, we at The Dowling Group feel confident that we will be better able to adapt to these new rules in a proactive way, minimizing disruption to our clients’ retirement and financial plans.
To discuss exactly how you can stay ahead the issues that pertain to your plans, please call 203‑967‑2231 or email firstname.lastname@example.org. And as always, please feel free to share the information above with colleagues or family members if you believe they would find it useful.
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management
- Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
- Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
- The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
- All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
- The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
- The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
- Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
- The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
- The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
- International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
- Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
- Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
- Past performance does not guarantee future results. Investing involves risk, including loss of principal.
- You cannot invest directly in an index.
- Stock investing involves risk including loss of principal.
- This newsletter was prepared using materials from RSW Publishing, who is not affiliated with the named broker/dealer.
- The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
- These views should not be construed as investment advice. Consult your financial professional before making any investment decision.
ADV & Investment Objectives: Please contact The Dowling Group if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth on Part II of Form ADV and is available for your review upon request.
It's a busy world. Our newsletter helps keep you tuned in to major market events, money-saving opportunities, filing deadlines, and other important information. One email per week and no spam — promise.Subscribe