You, Your Retirement, and the SECURE Act
You may have missed the news – buried in a much bigger spending bill, and passed in the thick of the holiday season. But after months of nearly bringing it to the finish line, it’s now official: On Friday, December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.
The SECURE Act provides a mixed bag of incentives and obligations for retirement savers and service providers alike. Its intent is to make it easier for families to save more for retirement.
That said, “easier” doesn’t necessarily mean less complicated. As your fiduciary financial advisor, we’re glad we’re here for you! To jump-start the conversation, here is an overview of the most significant changes we’ve got our eye on, as the SECURE Act starts rolling out in 2020.
As you might expect, all the points below come with detailed exceptions and disclaimers that may influence how they apply to you. Before proceeding, please consult with us.
Tax-Favorable Retirement Saving
Compared to previous generations, more Americans are living longer, remaining employed into their 70s, and shouldering more of the duty to fund their own retirement. As such, the SECURE Act includes several incentives to start saving sooner, and keep saving longer.
Initial RMD Increases To Age 72
Until now, you had to start taking Required Minimum Distribution (RMDs) out of your traditional IRA at age 70 ½. RMDs are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals remain unchanged.
IRA Contributions For As Long As You’re Employed
If you work past age 70 ½, you can now continue to contribute to either a Roth or a traditional IRA. Before, you could only contribute to a Roth IRA after age 70 ½.
An Estate Planning Limitation: Stretch IRAs Mostly Go Away
It’s presumably to offset the expected reduction in federal income tax collections, due to increasing the RMD age to 72. The SECURE Act eliminates the use of stretch IRAs for most beneficiaries, which could impact your current or future estate planning.
To be clear, a stretch IRA is not a formal account type. It’s a practice, that enabled you to bequeath your IRA assets to your heirs, who could then keep the inherited account intact and tax-sheltered, essentially throughout their lifetime. With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within a decade after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.
With respect to retirement plan and IRA account owners who die after December 31, 2019 who name designated beneficiaries who are not a surviving spouse of the account owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the account owner, or a child of the account owner who has not reached the age of majority are required to have all of the account balance distributed by the end of the 10th calendar year following the year of account owner’s death. In the past the distributions could be made over the life expectancy of the beneficiary, thus the new law shortens the time frame for making such distributions. However, distributions do not have to be equal or made each year as long as the account balance is distributed by the end of the 10th calendar year following the year of the account owner’s death. That does allow for some planning opportunities.
Beneficiaries of account owners who died prior to or by December 31, 2019 are not affected by this law change and can continue taking required minimum distributions as they were required in the past.
Expanded 529 Plan Possibilities – Student Loan & Apprenticeships
You and your children can now use 529 college savings plan distributions to pay off up to $10,000 in student loans – per plan beneficiary and their siblings. For example, if you have one 529 plan account but two children, you can use that account to repay up to $10,000 of each child’s student loans ($20,000 total) out of the single account. Again, check the fine print; there are some procedural details and tax ramifications to be aware of. You can now use 529 plan distributions for expenses related to a qualified apprenticeship program.
Birth or Adoption Events
There are quite a few other components to the SECURE Act. Some of them are aimed at managing access to your retirement savings for pre-retirement spending needs. For example, the SECURE Act now allows parents to withdraw up to $5,000 from their IRA without penalty (but with potential income taxes) for birth or adoption events. It also now prohibits plan providers from allowing participants to take out 401(k) plan loans using credit cards.
As you might expect, we prefer ensuring your financial plan budgets for upcoming spending needs without having to tap into your retirement reserves. If it might not, let’s get together soon and plan accordingly.
Planning for Your Secure Retirement
What can we expect moving forward? Not every component in the SECURE Act is effective immediately. Some may continue to come into sharper focus over time. We may recommend some changes to your financial planning in the near future, while other steps may be required or desired over time. This is to be expected given the number of reforms enacted in this sweeping bill. Come what may, we look forward to being by your side throughout.
As we embark into 2020 together, we will be connecting with you to ensure that your retirement planning complies with and takes optimal advantage of the SECURE Act of 2019.
The Market Has No Memory
Dimensional Founder David Booth discusses the lessons from 2019 that investors can apply to 2020.
I have worked in finance for over 50 years, and it seems that every January the same thing happens. Lots of folks look back at last year’s performance to draw conclusions they can use to predict what markets will do in the year to come. I don’t make predictions, but I do think it’s worth answering this question: What are the lessons from 2019 that we can apply to 2020?
Let’s go back to where we were this time last year. The words running across CNBC’s home page were, “US stocks post worst year in a decade as the S&P 500 falls more than 6% in 2018. ” The Wall Street Journal summarized the state of market affairs with this headline: “U.S. Indexes Close with Worst Yearly Losses Since 2008.” Amidst gloomy predictions for 2019, I posted a video on the limitations of forecasting.
Things felt ominous. We started the year with a lot of anxious people. Some decided to get out of the market and wait for prices to go down. They thought that after 11 years, the bull market was finally on its way out. They decided to time the market.
We all know what happened. Global equity markets finished the year up more than 25%(1), and fixed income gained more than 8%.(2)
Missing out on big growth has as much impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?
The lesson from 2019 is: The market has no memory. Don’t time the market in 2020. Don’t try to figure out when to get in and when to get out—you’d have to be right twice. Instead, figure out how much of your portfolio you’re comfortable investing in equities over the long-term so you can capture the ups and ride out the downs. A trusted professional can help you make this determination, as well as prepare you to stay invested during times of uncertainty.
Not enough “experts” subscribe to this point of view. They’re still trying to predict the future. You’ve probably heard the saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.” I’ve been seeing people make this same mistake for 50 years.
We’ll never know when the best time to get into the market is because we can’t predict the future. And if you think about it, that makes sense. If the market’s doing its job, prices ought to be set at a level where you experience anxiety. It’s unrealistic to think the market would ever offer an obvious time to “get in.” If it did, there would be no risk and no reward.
So what should you do in 2020? Keep in mind 2019’s most important lesson (which is the same lesson from every year before): Stay a long-term investor in a broadly diversified portfolio. Reduce your anxiety by accepting the market’s inevitable ups and downs. Make sure the people advising you align with your perspective. Stop trying to time the markets, and you’ll find you have more time to do the stuff you love to do.
(1)Source: MSCI World Index
(2)Source: Bloomberg Barclays Global Aggregate Bond Index
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.
Diversification neither assures a profit nor guarantees against loss in a declining market.
Have You Planned Your Vacation for 2020?
Can you believe it? There is actually a “National Plan for Vacation Day”. It is celebrated on the last Tuesday of January of each year to encourage Americans to plan their time off. You might have missed it on January 28, 2020. I can’t believe that I already have three vacations scheduled on my calendar for 2020. I am right on schedule. There seems to be a day for everything. “National Pie Day” was January 23, 2020. I missed that one, but still have time to contemplate “National Cookie Day” on December 4, 2020. If you are a baby boomer like myself you might recognize the words of the last great comedian Jackie Gleason-“How sweet it is” whose words might sum up all of these special days.
On a serious note, if you are in the process of planning a vacation, you may have forgotten a very important aspect in your planning. Travel Insurance—who needs that? Well, you may not need it if you are taking a cheap trip within the United States or can afford to lose any pre-paid trip expense. However, if you are leaving the United States you should have insurance coverage for emergency medical and evacuation coverage. Most of these types of trips need to be prepaid and can be expensive, so you should insure against the possibility that you might have to cancel your trip for medical or other reasons.
Credit card fraud does not seem to be slowing down at all. The risk of credit card fraud increases when using your credit cards in unfamiliar environments. Things such as cultural and language barriers can make credit card fraud more likely. When traveling you should notify your credit card companies that you will be traveling and where you are traveling. Otherwise, the credit card company might flag your account causing you to lose access to your account. When you are traveling you might consider using a hidden pouch that you wear inside your clothes separate from your cash, purse, or billfold. Hopefully, this would avoid the theft of your credit cards while traveling. Also, be aware of possible skimming devices that can be fitted to card slots at ATMs or credit card slots. With planning ahead you can often prepay for hotels, transportation, excursions, and hired cars from the comfort of your home. This helps to minimize the need for some of your credit card transactions while traveling.
A little preplanning can make your next vacation go smoother, and possibly make it more enjoyable. So besides deciding where you might be going or what you’re wearing on your next vacation, you should consider your need for and the importance of travel insurance and consider ways to avoid credit card fraud. Wishing you a belated happy National Plan for Vacation Day!
Investments provided through Wealth Management LLC, a Nebraska LLC, Registered Investment Advisor.
This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not assured.
The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice.