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Retirees should feel more SECURE in 2020

January 16, 2020

By STEVE WHITTINGTON, CFA

Happy New Year!  And with the New Year, comes change.  While the slogan “new year, new you” is often a popular one to use for self-motivation as the New Year comes, that is going to be especially true of people nearing (or in) retirement beginning in 2020.

On December 20th of last year, President Trump signed into law the SECURE Act, an acronym for “Setting Every Community Up [for] Retirement Enhancement.” And while the bill was part of a larger push to avoid a set government shutdown, there is no doubt that the bill will have large ramifications for years to come. You see, SECURE affects retirees directly, but it has also changed several rules that will affect small businesses, estate planning needs, and education.  Of note, the following changes only apply to eligible people AS OF January 1, 2020.  Everyone who was eligible and subject to the laws prior to this date will continue complying with the legacy rules and regulations.

For a little context regarding some of these rules consider that Americans are living longer. In 1960, the average life expectancy of an American was 69.77 years. In 2019, that number had risen to 78.49 years.  Our retirement guidelines and rules haven’t changed a lot over the years; a retirement age of 65 sounded appropriate in 1960 but what about now?  Not only that, but as Americans are living longer, they are working longer; and a lot of them like working longer.  As such, things like required minimum distributions (RMDs) and other increasingly arbitrary age restrictions are tripping up this segment of the workforce.  Why be forced to take a withdrawal on a retirement account, take the tax hit, and not need the cash?

SECURE aims to address some of these things.  For example, the Act raised the RMD age from 70.5 to 72.  Further, people can still contribute money to an IRA after 70.5, which means they are able to extend their tax sheltered benefits by a year and half while at the same time put more money into a tax sheltered vehicle.  That’s a win-win for retirement age workers.

For people of any age who fall short of full time employment status (i.e., part-time workers), the Act has made it easier for this segment of the American workforce to put some money away for retirement by now making them eligible for their employers 401(k) plan. While they do have an hours worked-to-year threshold to appease, this seems like a boon for a very large section of the workforce, whether it be young folks who can’t get full employment at this stage in their work life, or voluntarily under-employed folks (like moonlighting retirees).

While those rules seem fairly straight forward, there are a few rules that may cause some scrambling, especially on the estate planning front.  Namely, the new rules for inherited retirement accounts is a big estate change.  That is, under the old law, with an inherited retirement account, those assets could be distributed over the beneficiary’s (that’s you!) lifetime.  Under the new law, however, those assets must be distributed over a 10 year period.  That could create a much larger tax bill for the beneficiary than previously anticipated. If you’re a beneficiary in this potential situation, a consultation with an estate tax attorney or a financial planner might help you alleviate some of that pain.

To know the law is to protect yourself from the law, so please, ask your financial advisor about what makes sense for your situation.  Hello 2020!

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