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.
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.
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
The new legislation gives you a chance to continue to build
your tax-advantaged nest egg later in life.
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
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.
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.
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
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
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.
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.
multi-employer qualified plan option helps boomer workers, boomer business
owners and subsequent generations of small business owners plan for retirement.
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.
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.
I will continue coverage of the legislation on my radio show/podcast as the law unfolds. Sign up at GenerationBoldRadio.com to receive free programs by e-mail.