Don't feel guilty if the news of the Secure Act passed you by late last year. The bill was enacted into law on December 20, 2019, and for most Americans, it got lost somewhere between the roasted chestnuts and the pumpkin pie, and all memory of it was likely tossed out with a pile of wrapping paper and ribbons.
But as we close in on Easter, it’s time to take a good look at this new law, and determine who really stands to gain the most. Yes, absolutely, some aspects of the new bill are beneficial—for example, many part-time workers will now be eligible to participate in employer-sponsored retirement plans, and small business owners can now set up affordable “safe harbor” retirement plans that are easy to administer. But as often happens with pieces of legislation, the government and politicians are the real beneficiaries. In my experience, most consumers assume that changes in law are made for their benefit — but in many cases, it’s the exact opposite.
Let me apologize to my regular readers if they think I’m being overly pessimistic here — I consider myself to be a realist. In my role as a financial planner (a role I’ve taken seriously for 30 years) I am always looking at what the glossy company sales brochure doesn’t tell you. It’s my job to uncover the “gotcha” so my clients don’t suffer in the years to come.
For example, have you ever wondered why the magical ages of 59 ½ and 70 ½ are the trigger dates for penalty-free withdrawals from retirement accounts, and required minimum distributions, respectively? Take a look at the age of the politicians who drafted the rules, and there’s your answer. Traditionally, every great new tax break also has incentives that stand to make the government more money in the long run.
The Secure Act’s major change — the one that might have caught your eye back in December — was to delay the start of mandatory required minimum distributions (RMDs) to 72. Why 72? Why not 71 or 75? My gut instinct is that the percentage of taxpayers who will be turning age 70 and older is projected to double over the next 20 to 30 years, now that we’re at the peak of the Baby Boomers hitting retirement… So why not let them take their money out after the election and have the market rally last another year and a half? Yes, I may sound cynical, but I’m also honest.
Back in 1978, after a 10-year negative return in the stock market, the government introduced 401(k)s, IRAs, and instituted capital gains taxes — all of which we’ve come to know and love (or hate), but at the time, they were nothing more than tax incentives to entice consumers to invest in the stock market. With IRAs, the concept was simple: Invest your $2,000 pre-tax, at a time when you have a mortgage, kids, and other large deductions, and then when you hit 70 ½, your account has risen to $20,000 and you have limited deductions, you’re forced to take the money out.
With the Secure Act, the real windfall for the government will come at the expense of the consumer — the delaying of RMDs till age 72 also comes with the elimination of something called the “stretch” provision for everyone other than spouses and a select few eligible beneficiaries… What does this mean? In the past, when you left your IRA to a beneficiary — any beneficiary — they could stretch out those RMDs over the course of their lives, guaranteeing income for decades to come. But the SECURE Act changed all that. Most beneficiaries will now have to distribute their entire inherited IRA within 10 years of the death of the original owner, meaning they’re going to pay more in taxes. A lot more. In other words, all that nice pre-tax retirement money that is part of the projected billion-dollar wealth transfer will now be taxed over a single decade, rather than over the course of 70 or 80 years, or more.
Your Best Plan Moving Forward
So, what does all this mean for you? I’m encouraging all my clients (barring an expected windfall that will hit their accounts between age 70 ½ and 72) to start taking money out of their retirement accounts even more aggressively than before. After all, in 5 short years, if the deficits in this country aren’t controlled, the Tax Cuts and Jobs Act will sunset, and taxes will revert back to 2017 rates, meaning many retirees will pay more.
Look At Who Really Benefits
In my role as a financial planner, my clients pay me to analyze all sides of a situation and give it to them straight. As I mentioned before, some portions of the Secure Act stand to benefit consumers, which is wonderful, but don’t lose sight of the fact that they also benefit the government and the markets as a whole. For example, individuals with student loan debt can now take out $10,000 from a 529 plan to pay down their debt. And the more unencumbered by student debt someone is, the more they can invest in their retirement accounts. Also, employers establishing retirement plans can now earn up to a $5,000 tax credit, with an additional $500 credit for incorporating an auto-enrollment provision. Since one of the major characteristics of all retirement savings is that your money must be given to someone else to use (in stocks, bonds, bank accounts, or insurance accounts) it’s no secret that whenever you want to enjoy those retirement dollars, you’ll pay tax (and perhaps a penalty) to the government first. If you take nothing else away from this conversation, never forget that the biggest beneficiary of increasing retirement savings is the financial markets.
It’s funny how that works, isn’t it? I encourage all my clients to understand and embrace the fact that government tax breaks, and the provisions in most new laws are rarely written with your best interest in mind. But (and this is an important “but”) there are ways for you to benefit in the long run, if you read the fine print and have a financial advocate in your corner… This is just one more reason I’ve never heard a client say “I wish I hadn’t done so much financial planning.”