Does your spouse, or loved one, occasionally address you in a peppier tone than normal? It’s typically a question in a sing-song pitch that preludes something you have no interest in. Case in point: Michelle shrewdly asked me over a holiday happy hour – disrupting a well-deserved Makers - ‘Hey Den what do you think of adopting a cute, abandoned kitten?’ While I’ve warned her that she’s slowly treading into weird cat lady territory, I took the bait - inquiring what was so special about this one. She purred how sweet, adorable and cuddly the kitten was. Then softly added: she has one eye.
This ordeal reminds me of whenever our altruistic government proposes new tax laws. They sell us on the illusory taxpayer benefits and, of course, come up with some cutesy name or acronym. The latest federally sponsored Trojan Horse is the 2020 SECURE Act: Setting Every Community Up for Retirement Enhancement. The Secure Act predominately addresses IRA’s and company sponsored retirement plans. While seemingly self-serving, the Act does have a few taxpayer friendly nuggets. Let’s sift through the rubble.
Required Minimum Distributions (RMD’s)
The current Required Beginning Date (RBD) for IRA distributions is age 70 ½. Under the Act, this advances to age 72 (if you turn 70 ½ in 2020 or later, this applies to you) so that year and a half allows accounts to further grow without taxation. This also repeals the age limitation (70 ½) on traditional IRA contributions. I assume the Uniform Mortality Tables, used for RMD calculations, will be updated.
Beneficiary IRA’s
This is basically the due-bill for the RMD age roll back. Under current rules, those that inherit IRA’s from spouses, parents or even friends, can usually stretch the distribution period over their lifetime. This is tax friendly as younger beneficiaries have an extended time for the IRA to accrue benefits without mandated, annual taxable distributions. While the spousal lifetime exemption (along with minor children, chronically ill, & beneficiaries less than 10 years younger) remains intact, non-spousal beneficiaries must now liquidate the entire account within 10 years. The good news: you are grandfathered if you have already begun to draw on an inherited IRA.
Legal strategies to consider: Roth IRA conversions (though now subject to 10-year non-spousal liquidation). While you’ll pay tax upfront on the conversion, doing annual partial conversions could alleviate the tax impact later. Also naming more beneficiaries will ultimately spread the tax liability around as large annual distributions may be taxed at lower rates. Life insurance may gain some traction by funding the policy with IRA distributions and the tax-free death benefit going to beneficiaries. If you have named a trust as your beneficiary, you may want to reconsider a Charitable Remainder Trust. Lastly, you can still make qualified charitable distributions (QCD’s) but the $100k annual limit is now reduced by any aggregate distributions made in previous years.
Annuities in 401(k)s
This provision shows how powerful Insurance PACs are. It will now permit employers to offer annuities with lifetime guaranteed income streams within their retirement plans. This will allow conservative participants to elect a fixed annuity to accumulate & compliment more aggressive plan investments. The Secure Act also allows direct transfers of annuities from one company sponsored plan to another while avoiding surrender charges and fees. The Act requires plan sponsors to report the updated monthly payment participants can expect in retirement.
Theoretically, the Act puts a fiduciary onus on plan sponsors to select the most appropriate, cost effective and financially healthy annuity provider. But given annuities’ inherent complexity, I’ll be very curious what makes the final draft. Regardless, this proviso seems rife with potential conflicts of interest.
Overall, the Secure Act is a pretty mixed bag. The RMD extension is the only real milk bone thrown to taxpayers. Retirement plan annuities have a lot of wrinkles to be worked out and the non-spousal Beneficiary IRA relinquish is a rug yank. I can’t even call this a huge money grab as it’s only forecasted to yield $15 billion in additional taxes over 10 years. But the biggest tell is that it passed easily in both the House (471-3) and Senate (81-11). Lots of greased palms in Washington.
It is not lost on law makers the potential staggering wealth that will be transferred in the next 30 years – estimates as high as $68 trillion. They also realize tapping into this wealth could alleviate federal deficits & social security solvency pressures. But it’s also about power. The Secure Act throws a wrench into many hard working & saving retirees’ estate plans. Repealing the stretch IRA? What about all those with converted Roth IRA’s that may need to be prematurely liquidated? Cynicism aside, we play by the rules dictated to us. Be it more thorny retirement laws or right turning impaired pets, our voices aren’t always heard. But if it means not receiving IRS notices nor sleeping on the couch, I guess it’s worth it.
Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends. Houlihan Asset Management. Wealth Counseling/Asset Management. Copyright 2020
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