I last wrote about the Secure Act back on July 18th of this year. The name is an acronym for Setting Every Community Up for Retirement Enhancement. As I mentioned then, someone stayed up late one night coming up with that to reflect the message of security.
The idea behind any effort that allows people to set aside current income and defer taxes is for the government to be pro-active in encouraging us to do just that. It creates an incentive to build financial reserves from our own efforts that will be used later when we stop working. All good stuff.
Next, they create disincentives by including penalties if you take it before what was largely an imaginary age, 59 1/2. And again by imposing penalties if you failed to take what became known as RMDs, otherwise known as Required Minimum Distributions. You should never lose sight of the fact the IRS exists to find money that the government will use to pay it’s bills.
It’s a system that largely works and one that we’ve become accustomed to. However, as time passes, circumstances change and the weight of criticism pushes those we’ve put in charge to make some changes. The SECURE Act is a response to that.
It’s not without it’s benefits and it’s detractors, and that’s what I’ll explore next. Just know that I’m talking in general terms, I’m not yet an authority (maybe never will be…) on specific details. You’ll need to talk with your CPA to keep you out of trouble.
With more of us living longer and longer, while at the same time realizing that we may not have enough money to pay our bills when we’re into our 80’s, the demand that we begin RMDs before we want to has been galling for those who don’t need extra taxable income at age 70 1/2 .
There are two remedies present in the new law. One is that RMDs will now start when you are 72. But does that mean the tax year when you turn 72 or perhaps by April 1st of the tax year following your reaching age 72? Stay tuned for specifics.
The other is that you can continue to contribute to an IRA and maybe other qualified accounts beyond age 70 1/2. How much longer? I have no idea at this point. Given that many of us now continue to work beyond that date and want to limit our tax bills, that’s a good thing.
Another, though an indirect incentive for us, was to allow assets remaining in a qualified account to pass to our heirs when we died. They could then extract similar RMDs over their lifetimes. The formula was different but the basic benefit was there.
Now, not so much. For example, your children used to be able to “stretch” the tax bill over their lifetime. Now it’s limited to 10 years. This is an offset to your new ability to avoid RMDs until age 72. Remember, the IRS still wants and needs their money. They gave you a break but they take it away from your heirs.
Another change is to your ability to “borrow” money from your retirement accounts. You could never do that with a traditional IRA but you could with other types. You now have the ability to take money before the magic age of 59 1/2 if it’s to be used for child birth and/or adoption costs. With no penalty. It will still be taxable income, but have no penalties applied.
You might question whether you actually “own” your IRA or 401k money. You don’t until you take possession of a distribution from an account and it becomes taxable income. Before that, it’s technically owned by a custodian on your behalf. The new rules expand on this by allowing more access to annuities.
The value of annuities is that you are hiring an insurance company to hypothetically insure you against the loss of income in the event of a market crash or other event. You are hiring them to assume that risk, for a fee, in exchange for a guaranteed income far into the future.
The protections built into the rules that apply to employer sponsored plans tended to disallow annuities because the providers of those plans tended to lack or not be held to fiduciary standards. That’s the measure where their advice to you has to be in your best interest and not theirs’.
Those protections may now have to be relaxed to allow for the offering of annuities and the company offering them. When they offer them to you as an “investment” choice under an employer plan, your advisor is not necessarily a fiduciary. It will muddy the water since presumably those now qualified to offer traditional investments will still be held to fiduciary standards.
There’s more to learn about this new law, but on balance I think it’s a good thing.
Tony Kendzior \ 17 JAN 2020