By MARC SILVERMAN
On May 23, 2019, the House of Representatives approved major reforms to 401(k) plans and IRAs. The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, passed the House with near-unanimous backing and is currently on track for Senate approval later this year. If President Trump signs the bill, as expected, the package would constitute the largest piece of retirement reform in over a decade.
Large reforms like this often create uncertainty and nervousness for clients. Since the information is more technical in nature, some clients who don’t seek out financial or regulatory news may not hear about the changes at all. By proactively understanding potential reforms in moments like these, we can be prepared to help our clients navigate the shifting legal landscape and reiterate how they can best continue to prepare for retirement.
Expanding 401(k) Options
The SECURE Act would enable several large changes to 401(k) programs. Regulators have been pushing to make it easier for employers to offer 401(k) plans that can supply steady lifetime incomes. As part of the solution, annuities would become available within 401(k) plans for the first time. Though the debate over when annuities are an appropriate option to sell to clients continues, this reform could help clients fill the gap left by the disappearance of corporate pensions and the potential depletion of the Social Security Trust Fund. The income provided by annuities would also be insulated against market swings, providing some security against sequence of returns risk.
Should this legislation become law, clients may have questions about their new options. Since annuities are mostly regulated on the state level, advisors may need to invest time in additional research to ensure their clients are using the best sources of retirement income available. This will be especially important for clients intending to move across state lines after they retire.
The SECURE Act would also require employers to allow long-term, part-time employees who are at least 21 and work at least 500 hours annually to participate in 401(k) plans, which would allow many young adults to make an earlier start on retirement savings. Employers would also be required to include monthly income estimates on 401(k) statements, making it easier for employees to see how they are tracking against retirement goals. Advisors can help employers plan for new responsibilities, and help employees by walking them through their new opportunities.
Changes To IRAs
The SECURE Act would also make several changes to IRA regulations. For example, the age cap for contributing to a traditional IRA, would be repealed along with the age limit on tax deductions connected to those contributions. The current age cap is 70.5 and repealing the cap would make it easier for clients who continue earning taxable income past traditional retirement age to invest in a retirement account. Additionally, the bill would increase the age where minimum distributions become mandatory from 70.5 to 72.
To pay for the above reforms, the rules for inheriting IRAs would see drastic alterations. Currently, those who inherit IRAs can liquidate the account balance over the span of their own lifetime, substantially reducing their short- and medium-term tax burden. The SECURE Act would require inheritors to liquidate balances and pay associated taxes within 10 years of the death of the previous owner. Exceptions would be made for surviving spouses, minor children and inheritors who have a disability or chronic illness.
The IRA inheritance regulation shift would substantially change the dynamics of inheriting retirement accounts, and many clients could be caught unaware. Should these changes become law, advisors should proactively educate their clients, to prevent them from unwittingly passing down a more immediate tax bill to their surviving family members.
If passed, the SECURE Act would represent a major overhaul of retirement regulations. It would open doors for some clients and introduce new legal responsibilities for others, while creating new ethical responsibilities for advisors. By walking clients through these prospective changes, advisors can make sure they’re prepared to best take advantage of them.
Marc Silverman is the President of Silverman Financial, Inc., a boutique retirement planning firm specializing in working with employees of state government bodies, utilities and telecommunications companies. Marc’s securities and advisory services are offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Marc has worked in financial advising for over 30 years and has CLU, CFC and CFP certifications. He has been a member of MDRT for 35 years and has both Qualifying and Lifetime Membership as well as 25 Top of the Table qualifications. Marc lives with his wife, Patti, in Miami, Florida.