Stock markets in the U.S. rallied in the 4th quarter capping off a strong 2019 against the backdrop of the longest economic expansion on record. The strength of the U.S. economy helped lift other major markets around the world as well.
Interestingly, most markets traded sideways from April to September, but rose significantly to close out the year, a marked departure from the dismal end of 2018.
The markets experienced a number of tailwinds in 2019: expanding equity multiples, continued historically low unemployment, rising wages, low inflation, and the appearance of a de-escalation in trade skirmishes between the U.S. and many of its major trading partners including China, Europe, Canada, and Mexico.
Perhaps more impactful was the continued stimulus from global central banks, namely the Federal Reserve and the European Central Bank, further favoring equities and fixed income investments.
As we enter 2020, market pundits are all too eager to provide predictions about the economy and the markets. Regardless of their outlook, rest assured the direction of the markets will be informed by cyclical and long-term trends that have influenced the markets in the past: corporate earnings, interest rates, various macroeconomic data, geopolitical dynamics and unpredictable events.
This year, the markets will also contend with the implications of the approaching presidential election and fallout from the outcome.
Amid the political rancor over impeachment and our standoff with Iran, Congress quietly passed The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). This is the most extensive retirement savings reform legislation in many years.
President Trump signed the overwhelmingly bipartisan bill into law on December 20, 2019 as part of a broader 2020 fiscal year appropriations bill, the Further Consolidated Appropriations Act, 2020.
The SECURE Act has far reaching implications from a tax and estate planning perspective. As such, we introduce some of these important changes and our thoughts on how we plan to address them with you.
The state of retirement readiness of Americans remains a hot topic, even in the halls of Congress. With the decline of traditional pensions since the late 70s, most individuals have been responsible for planning and saving on their own for retirement.
In today’s self-serve retirement planning world, savers rely largely on 401(k) plans and IRAs to supplement Social Security income in retirement. However, studies show rather dismal statistics on Americans success in doing so, as one-fourth of workers have no retirement savings at all— including 13% of workers age 60 and older.
In response, Congress passed the SECURE Act as a step toward helping employers and individuals have better access to retirement tools and to be able to save as long as they are working, regardless of age.
This may be just the beginning of such legislation. For instance, Senators Rob Portman (R-OH) and Ben Cardin (D-MD) recently introduced another bill, the Retirement Security and Savings Act of 2019 (RESA), designed to further reform our retirement system with many other bills in the works as well.
The following are the key provisions of the SECURE Act. While the bill is designed as retirement plan reform, there are a few important aspects of it targeted to individuals, which we will list first.
In the case of the reduction in the stretch IRA, unfortunately, this is a sacrificial lamb to provide funding for some of the other provisions of the bill. This change alone is estimated to raise $15.7 billion dollars over the next 10 years!
RMDs extended to age 72
Before the SECURE Act, the law required that most individuals take out required minimum distributions (RMDs) from their retirement accounts once they reach age 70 ½. If you work past age 70½, RMDs from your current employer’s 401(k) are not required until after you leave your job, unless you own at least 5% of the company.
The SECURE Act pushes the age that triggers RMDs from 70½ to 72, which means you can let your retirement funds grow an extra 1½ years before beginning distributions. The RESA Act could further enhance this. The bill, which is currently in the Senate, seeks to push RMD requirements back even further to age 75.
RMDs for individuals who turned 70 1/2 in 2019 are not delayed. Instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act.
No age restrictions on IRA contributions
Americans are working and living longer, yet they were prohibited from making IRA contributions past 70 ½. The SECURE Act repealed this rule, so now you can continue to put away money in a traditional IRA if you work into your 70s and beyond. As before, there are no age-based restrictions on contributions to a Roth IRA.
For those donating to charity using Qualified Charitable Distributions (QCD), to the extent you make IRA contributions after 70 ½, it will reduce the QCD allowance by the IRA contribution amount.
Stretch IRAs eliminated
The SECURE Act eliminates the previous rules that allowed non-spouse IRA beneficiaries to stretch RMDs from an inherited account over their own lifetime and potentially allow the funds to grow tax-deferred for decades.
Instead, all funds from an inherited IRA generally must be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. The rule applies to inherited funds in a 401(k) account and other defined contribution plans. If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until end of the year that the deceased IRA owner would have reached age 72 (age 70½ before the new law).
Those who turned age 70½ in 2019 must still operate under the old rules.
There are some exceptions to the general rule. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches majority age. At that point, the 10-year rule kicks in.
The potential tax burdens of faster distributions of inherited retirement accounts will increase the need for proper estate planning and potentially more strategic Roth conversions during the life of the account owner, adding additional complexity to retirement and estate planning.
Help for small businesses offering retirement plans
It is harder to save for retirement if your employer doesn’t offer a retirement plan. While most large employers have plans, this is not the case for many small businesses. The SECURE Act has three provisions designed to help more small businesses (under 100 employees) offer retirement plans for their employees.
Deadline to establish a plan
This provision extends the period of time for companies to adopt new plans. Under previous law, a new plan had to be established before the end of the tax year. Under the new law, plans can be established up the due date of the year’s tax return including extensions.
Auto-enrollment 401(k) plans enhanced
More companies are automatically enrolling eligible employees into their 401(k) plans. Workers can always opt out of the plan if they choose, but most don’t. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible.
The SECURE Act increased the automatic-enrollment cap on payroll contributions from 10% to 15% of an employee’s paycheck. Plans with auto-enrollment start with, say 3%, and then step up annually up to the cap. The challenge for employers is to calibrate these increases to encourage participants to maximize contributions, while not being so aggressive that participants opt out because contribution rates become too high.
401(k) for part-time employees
Part-time workers need to save for retirement, too. However, employees who haven’t worked at least 1,000 hours during the year typically aren’t allowed to participate in their employer’s 401(k) plan.
Starting in 2021, the SECURE Act guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period.
Annuity information and options expanded
Currently, 401(k) plan statements provide an account balance, but many participants do not know how to translate this balance into a reasonable income this money would provide in retirement.
To help savers gain a better understanding of what this monthly income might look like in retirement, the SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants.
These statements will show how much money you could get each month if your total 401(k) account balance were used to purchase an annuity. The estimated monthly payment amounts will be for illustrative purposes only.
The SECURE Act also makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks.
These annuities are now portable, too. So, for example, if you leave your job, you can roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.
Aside from 401(k) plans and IRAs, the Act expands the use of 529 education savings accounts to cover costs associated with registered apprenticeships, up to $10,000 of qualified student loan repayments, and certain costs associated with elementary and secondary education, including some homeschooling expenses.
Whether you are a business owner or an individual, The SECURE Act will most likely affect some aspect of your financial life. While the bill was recently enacted, our team at Wealth Dimensions has been analyzing and preparing for it since the original bill passed in the House last summer. Throughout the year, we will be discussing the specific considerations that apply to your personal circumstances with you to assist you in planning accordingly.
Thank you for your continued confidence in our services.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000.
Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.