The United States was facing a crisis among older Americans long before the coronavirus came along: A retirement crisis.
“The retirement crisis originated as a result of the shift away from defined benefits plans such as traditional pensions and other employer-funded plans, along with an increase in life expectancy,” says Brian Poe, CFP, wealth counselor at Versant Capital Management. “Previously, investors could rely on their employers to provide for their retirement needs — alongside Social Security payments. In the current environment, this is not the case.”
With an average life expectancy of 78.6 years old and an expected age of retirement of 62 years old, people need to save enough money to last at least 16 years. Unfortunately, less than half the population will have enough saved to maintain their standard of living, according to a report by the Boston College Center for Retirement Research.
“Statistics indicate the U.S. workforce has a significant retirement savings gap,” says Suzie Eyrich, senior wealth planner at BMO Wealth Management, “forcing many people to work well into their planned retirement years or pare back their ‘fun spending’ — such as travel and gifts to family — just to pay for their basic needs.”
In order to address this retirement crisis, the Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect Jan. 1 and includes many common-sense, long-overdue reforms that could make saving for retirement easier and more accessible for many Americans. Some of the key takeaways from the SECURE Act include:
• It repeals the maximum age for traditional IRA contributions, which is currently 70.5.
• It increases the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70.5).
• It allows long-term, part-time workers to participate in 401(k) plans.
• It offers more options for lifetime income strategies.
• It permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses.
• It allows parents to withdraw up to $10,000 from 529 plans to repay student loans.
“The SECURE Act can’t completely address increased longevity and changes to how we work — i.e. increased contract and gig economy work,” Eyrich says, “but it does take steps in the right direction to expand the options and accessibility for workers to save for their retirement.”
So is there anything people should be doing now in response to the legislation?
“As a result of the SECURE Act, it’s important to revisit beneficiary designations with your wealth planner and estate lawyer,” Eyrich says. “If you named a trust as the ultimate beneficiary of your retirement plan, that plan may have some unintended tax and distribution consequences.
Eyrich says individuals should also consider whether a Roth conversion, or a series of conversions, fits into your plan, especially if your goal is to lessen the tax impact to your beneficiaries.
“This is also a good year to consider Roth conversions for your individual tax plan,” she says. “You may pay less in income tax on every dollar you convert today if tax brackets and account values are higher in the future.”
Whatever your situation, financial management experts say the SECURE Act has the potential to offset at least some of the absence of pensions in the workforce and the absence of retirement planning for many who work for small businesses.
“Many retirement readiness statistics are alarming, in that individuals have not secured their own financial future, even at a time where they could live more than 30 years in retirement,” says Sherry Hall, CFP, CWS, AIF, president and financial adviser at Hallmark Financial. “Employer incentives can assist small businesses in being the facilitator for their employees to contribute to their future and allow employers to match. It can be a win-win for all.”
Here is what Arizona wealth management experts say are the most important things to know about how the SECURE Act could change the way you retire.
Impact on small business
Chris Smith, founder, Chris Smith Investments: “The secure Act has relaxed many rules around establishing and amending retirement plans. This will allow business owners more flexibility in adjusting their retirement plan to the changing needs of one’s business.”
Paris Davis, senior vice president, WaFd Bank Arizona: “The Act will allow small business to ‘pool’ together smaller plans to create a larger retirement plan for their employees at a potentially lower cost.”
Brooke L. Monahan, senior counsel, Quarles & Brady: “There are several provisions in the SECURE Act that should make it easier for smaller employers to set up and administer retirement plans. For example, the introduction of pooled employer plans will allow smaller employers to join forces and create one retirement plan, which presumably will be more cost efficient and easier to administer. The Act also provides tax incentives for small employers who elect to set up a retirement plan for the benefit of their employees (up to $5,000 for three years, which increases by $500 if there is an automatic enrollment feature). This should help to defray the costs related to setting up and maintaining a retirement plan.”
Impact on the individual
Thom Rindahl, wealth management advisor, TruWest Credit Union: “In the immediate future, I think two items will have the biggest impact on individuals: 1. For those individuals inheriting retirement plans from a non-spouse, that individual will no longer get the benefit of the stretch individual retirement account. Essentially, Mom and Dad pass away and leave junior with a 401(k) account. It used to be that Junior can make a lifetime income out of that inheritance and spread the tax liability accordingly. Not anymore. The account has to be liquidated within a 10-year timeframe. And 2. Part time employees who used to be excluded from company plans may now be eligible to participate in the company plan if they work 1,000 hours within a year or if they have three consecutive years of 500 hours of work.”
How individuals can benefit
Trevor Wilde, managing director and accredited investment fiduciary, Wilde Wealth Management Group: “With the RMD waiver for 2020, I believe there is an amazing opportunity for those people to consider converting portions of their traditional IRAs to a Roth IRA equivalent to why their RMD would have been. This would allow investors to move investments from their traditional IRA to their Roth IRAs and what we believe to be low levels. They pay tax on the amount converted but enjoy the gain tax free in the Roth.”
Poe: “The SECURE Act has the potential to give people more opportunities to save in tax-deferred retirement accounts and make contributions later in life, as long as they have earned income. Given the elimination of the stretch IRA, savings into Roth IRAs and 401(k) appear to be more advantageous under the SECURE Act. This is particularly true for individuals that might not consume their account balance in their lifetime.”
Davis: “Under the new law, individuals are not required to take their RMD until the age of 72 instead of 70.5 as previously required. Individuals are living longer and working longer; this new age requirement allows individuals to work longer while they continue to build their retirement nest. The delay of withdrawing from your retirement funds could provide additional advantages due to lower tax brackets.”
Dustin Mac Brown, CFP, AAMS, financial planner, DM Brown Financial Services: “The most important change in our office is not to our client’s retirement plans but to their legacy planning. We are reviewing all our multigenerational family plans to determine if spouse and generation-skipping is appropriate to reduce the taxation. We are already seeing results in second and third generations financial well-being by an early influx of capital. This, of course, goes hand in hand with financial literacy for the inheritors. You shouldn’t give anyone a tool that they do not know how to use safely.”
Rindahl: “There are a few items to keep in mind when doing retirement planning for oneself based on the SECURE Act. First off, RMDs have been pushed back to 72. This is good for a couple of reasons. You don’t need to pull money out quite as soon if you don’t need it and there is no more trying to figure out which calendar year you are 70.5. In addition to this, for those individuals who enjoy working, the age limitation has been removed for making individual retirement account contributions. The last major item that individuals will want to look at with their 401(k)s and retirement planning is whether they want to utilize a lifetime income benefit. The SECURE Act has made it easier for plan sponsors to offer this type of an option.”
Hall: “One of the most exciting provisions of this act is the ability for individuals who are still working past the age of 70.5 to contribute to an IRA. With the aging of America and a healthy, vibrant workforce in this age band, this allows for garnering more retirement assets as well as a potential current tax break.”