On May 23, an Act dubbed the Setting Every Community Up for Retirement Enhancement Act (SECURE) passed the House of Representatives. A nearly identical bill, the Retirement Enhancement Securities Act (RESA), is currently in front of the Senate. The eventual legislation will likely have aspects of both. Whatever the nuances in the ultimate Act, the legislation is the most significant change in retirement-related laws since 2006.
This legislation is as much a product of the boomer demographic as was the disposable diaper and store-bought baby food. Why? Because it reflects our extended longevity, the growing number of us that can and want to continue working beyond “retirement age”—but also the need for us to save more in retirement assets for the longer life we will live.
Let’s look at the legislation as it most affects boomers and preretirees.
#1. Your annual plan benefit’s statement must include the income stream you would receive at retirement if you annuitized your entire balance.
This “lifetime benefits disclosure computation” will give you both thefigure for your lifetime and the joint life of you and your spouse.
Of course, you will not be required to annuitize—but the new statement will give you a rare look at your potential income stream at retirement from your 401(k) or another qualified plan.
Having income-stream information will allow you to plan better and decide whether to work longer and whether to take joint and survivor options.
The glimpse into your financial future could be a motivator to make some lifestyle changes, save more and set realistic goals to put some extra gold in our golden years.
#2. The IRA contribution age limitation is lifted.
SECURE would allow continued contributions regardless of age. We are working longer, yet the current law disallows tax-deferred contributions to retirement plans after we reach 70½. Unless you have a ROTH plan, which receives after-tax contributions, you must stop contributing even if you work full-time.
The new legislation gives you a chance to continue to build your tax-advantaged nest egg later in life.
#3. The start date for the Required Minimum Distributions (RMDs) is increased.
You must be familiar with the Required Minimum Distribution (RMD) to appreciate the change in the law.
So here it is in a nutshell…
The RMD is the Internal Revenue Code’s mandate that you must start to make withdrawals from your retirement plans and pay the income tax attributable to the withdrawal starting at age 70½, and continue to make a yearly distribution and pay the tax until there is nothing in the account or you pass away.
SECURE raises your RMD start age to 72, and the Senate bill increases it to age 75.
As a speaker and trainer to financial advisors on the boomer client, I often point out that the RMD is a bigger problem for retirees than most planners anticipate. Any legislation that delays it is a good thing for the individual.
- You must pay the tax upon distribution of the RMD or be subject to a 50% penalty. The new law will postpone the tax a few more years and continue tax-deferred growth.
- Social Security tax. Postponing the RMD may keep your Social Security tax lower for a few more years.
- Because the RMD counts as ordinary income, it may raise your tax bracket depending on your other sources of income. Again, postponing the RMD may keep you in a lower tax bracket longer.
- Postponing the RMD allows you to choose for a few more years whether to withdraw or not in a down market. In 2008, millions of people over 70½ would have opted to leave their reduced savings in their 401(k)s to wait out a recovery. If SECURE were law, then they would have two to five years to do so, depending on whether the House or Senate version was in effect. Timing is everything in the market…the longer you, not Uncle Sam, is in control, the better.
Of course, for those of us who need to withdraw for our retirement income, the luxury of delaying withdrawal won’t mean much. We will still make taxable withdrawals, penalty-free after age 59½. SECURE does not change that.
#4. SECURE encourages more annuity options in retirement plans.
Both the Senate and House version will include provisions that will make it easier for the employer to offer annuities as an investment choice. If the employer follows specific stringent criteria for choosing a provider of group annuities, it will not be held liable if there is a failure-to-pay issue.
Despite all the naysayers, I like annuities. Annuities can stretch your income stream, cover long-term care and provide for your loved ones. But there are hundreds of choices. We need at least as much familiarity and transparency about annuities as we have about mutual funds. There will be oversight under Section 404 of ERISA. I hope that low cost, feature-rich annuities will eventually be available to you in your qualified plan. SECURE opens the door to that.
#5. SECURE creates multi-employer plans.
SECURE creates a structure for multi-employer 401(k)s for small companies to come together and establish a cooperative arrangement. The hidden boomer connection here is illuminated by a recent study published by the Kaufmann Foundation, which revealed that boomers are starting small businesses more frequently than Millennials…by double. The foundation’s Startup Index confirmed that 25.5% of all new entrepreneurs fall between the ages of 55 and 64.
Kaufman also reports that eight out of 10 boomer entrepreneurs started that business for lifestyle reasons, not economic reasons. That means boomerpreneurswould have the cash flow to contribute to a 401(k) for themselves and perhaps match funds for the holders of the jobs they create.
The multi-employer qualified plan option helps boomer workers, boomer business owners and subsequent generations of small business owners plan for retirement.
#6. There would be part-time worker plans.
Attention work-warriors: Employer plans may also cover those of you who have retired and now want to work part-time—at least 500 hours of service a year for three years. The part-time worker provision could be a significant “boomer boon,” as we often need/enjoy working and, sadly, find that no tax-deferred retirement plan is available unless we are credited with 1,000 hours or more a year.
#7. SECURE curtails the RMD stretch-out on death of the employee.
Under SECURE nonspousal heirs will no longer be able to stretch out distributions and pay the tax over their lifetime. The House bill limits the stretch-out to 10 years, and the Senate bill is more restrictive after a certain amount of inheritance.
The current stretch-out provision defers taxes on qualified funds through two generations, boomers and their heirs. Because of our growing longevity, the government potentially waits for a very long time to collect the tax. Under the new rules, Uncle Sam will “get paid” faster.
Whatever the final details, the new law is a rare recognition by both parties (hold your breath…it’s bipartisan) of our desire, ability—and perhaps need—to work longer.
We are healthier longer. We are active longer. We are not out to pasture. Public policy and laws are finally reflecting this phenomenon.
For most boomers, the new legislation has not come a minute too soon as the they have not saved enough for the decades ahead.