It’s easy to brush off much of what happens in Washington, D.C. as one giant “us/them” showdown as far as most issues are concerned. But on May 23rd, Americans learned something important: lawmakers want secure retirements for as many folks as possible. So much so, the House of Representatives crossed aisles to make it happen by voting 417-3 in favor of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), which heads to the Senate next.
“You look at DC and you run the risk of thinking we’re not on the same page of so many different things,” says Scott Matheson, Managing Director and Defined Contribution Practice Leader of Raleigh, NC-based CAPTRUST. “What we saw here is that no matter what side of the aisle you are on, there is pretty good alignment.”
Agreed-upon provisions pertaining to retirement include granting retirement account access to workers who have not otherwise had it, including small businesses, home healthcare workers, community newspaper employees, and long-term part-time workers. Lawmakers are also accounting for longer life expectancy and the onset of older workers delaying full retirement until later in life.
Here are some ways the Act could impact advisors, according to Matheson:
Required Minimum Distributions (RMDs)
The current age for RMDs to kick in are expected to increase from age 70 ½ to age 72 in 2023, and could rise to 75 by 2030. “This move is designed to account for the fact people are all living longer,” says Matheson. “But the other “fix” needed to truly account for longer life expectancies is to update the life expectancy tables published by the IRS which are used to calculate the RMD itself.”
Also notably, a non-RMD related change that does affect IRAs is the provision eliminating the age limit for deductible contributions into traditional IRAs. “This will present an opportunity for continued tax-deductible savings for some portion of our wealth management clients,” says Matheson.
Non-spouse inherited IRAs
With the exception of minor children and people with certain disabilities, SECURE will require most inherited IRAs to be fully distributed within a decade of the owner’s death. This effectively eliminates the vast majority of stretch IRA opportunities.
Matheson says there is now potential inclusion of previously excluded stretch IRA distributions into client estate plans and adds that, “future use of alternative financial planning-based strategies for certain clients, may include other tools such as charitable remainder trusts (CRTs) and qualified charitable distributions (QCGs).”
Annuities in 401(k)s
Lest we forget, Americans continue to be woefully underprepared to fund their retirement. In October 2017, the Government Accountability Office (GAO) reported that median retirement savings for Americans between age 55 and 64 was $107,000. Legislation seeks to bridge that gap in several ways, including increasing the Safe Harbor Cap to 15% of employee pay from 10%.
In spite of the safe harbor provided through SECURE “we would anticipate the possibility of implementing the annuity inside the 401(k), assuming the pricing is better than a retail annuity product and the in-plan annuity has the desired features and design elements,” says Matheson. “However, while we are supportive of institutionally priced annuities being offered inside 401(k) plans, we are also aware of the other obstacles to plan sponsor adoption.”