Do you ever feel like tax rules and regulations are shrouded in mystery?
Ever feel like you’re not sure if you’re making the right moves regarding your retirement accounts?
Well I want to help eliminate some of that mystery and provide a bit of information on the Secure Act and what the new retirement rules are and how they differ from the old rules to provide you with some clarity!
So let’s look at the core challenge we’re all facing: The SECURE Act changes the retirement rules for individuals and companies, which means current and future retirement plans need to be reviewed and adjusted.
Funding your retirement is likely one of the biggest financial challenges you will encounter in your entire life. You buy a house, start a family, send your kids to college, and then somehow need enough money to live for 20 to 30 years without a paycheck. It's enough to make anyone stressed!
As if that weren't enough, the government has all sorts of rules about how you can save your money, and when you can or can't take that money out. Sometimes there is a penalty for withdrawing money before a certain age. Sometimes you have to withdraw funds even if you don't need them and would rather they stay invested. Many people don't know about these rules, and they make mistakes which hurt their financial plans.
Not to mention, the idea of "retirement" is changing. The boomer generation is going into retirement, and many have not saved enough money to live comfortably. Lifespans are getting longer, and people are putting off retirement, whether because they want to or because they have to. Younger generations pull income from multiple sources and jobs throughout their lives. So the old rules aren't applicable anymore.
Those are the driving forces behind the SECURE Act, which changes the retirement rules for both individuals and companies. No matter where you are in your retirement savings, current and future plans need to be reviewed and adjusted.
SEEK PROFESSIONAL TAX GUIDANCE
Everyone’s tax situation is different. You should always consult a qualified professional tax advisor to discuss your specific tax situation, especially about these topics:
- Traditional IRAs (tax-deferred): You must pay taxes on distributions or conversions at ordinary federal and state rates.
- Roth IRA (non-deductible): Money has the potential to grow tax-free and earnings may be withdrawn tax-free in accordance with IRS rules.
- State taxes: This presentation references federal taxes. You may still face state taxes. Check with your tax professional.
WHAT’S THE IMPACT?
The SECURE Act was finally signed into law in December of 2019, after a long time in legislative limbo. Believe it or not, it's the biggest retirement-related legislation in over a decade and had bipartisan support. Congress realized that retirement rules need an update, for all the reasons mentioned above.
The impact is far-reaching, from "the silent generation" and boomers who are thinking about estate plans, to boomers and Gen X focused on retirement, to millennials and Gen Z who will be the recipients of a great wealth transfer in the next few decades. Like I said, everyone needs to reevaluate their financial plans.
Taxes are more complicated than you probably realize, and a key part of your savings, investments, and retirement plans. If you don't plan ahead, you will miss out on saving opportunities and possibly pay more in taxes than necessary.
In addition, the government sees businesses as having a continued and expanded role promoting retirement savings by their employees.
I want to make sure you understand how the changes will impact you, your family, and if relevant, your business, which is where we’ll start first.
"I don't run a business, so how does this aspect really relate to me?"
It’s a good question, so let’s look at some of the details.
The workplace is where retirement savings begins, so these new rules are important to everyone. The SECURE Act is about promoting better retirement savings and there’s a clear role for employers.
Our first key is: “Businesses have more incentive to create retirement plans and promote greater participation by their employees.”
New Rule: $5,000 tax credit for small businesses starting plans
According to the U.S. Census Bureau*, 98.2% of American employers have fewer than 100 workers, which is how the IRS defines a small business. So this next item is a lot more important than it might seem.
Congress is authorizing more help for small businesses in the form of tax credits. Small businesses who start a retirement plan can now claim a credit of up to $5,000 for up to three years to help with startup costs. This is a substantial increase from the previous $500 credit that was available.
In addition, small businesses who adopt an auto-enrollment retirement plan can claim another $500 for three years, separate from the credit mentioned above. This applies not only to brand-new retirement plans, but any existing ones who adopt the auto-enrollment option.
Hopefully, these tax credits will encourage more employers to offer retirement plans, which in turn allows more Americans to save. If you think this might affect you, talk to your employer or HR director about what they might be doing.
New Rule: 401(k) auto-enrollment deferral cap boosted to 15%
In an effort to encourage and increase retirement savings, some employers are using auto-enrollment for their 401(k) plans. That means new hires are automatically enrolled in the plan and must opt out instead of opting in.
Studies have shown that auto-enrollment is increasing 401(k) balances, so Congress wants to continue the good work. Companies that auto-enroll can slowly increase the percentage saved each year (again, unless the employee opts out). Previously, 10% of a salary was the maximum that could be automatically deferred. Now employers can set the default to 15% of an employee's salary.
This might be a good time to look at your own 401(k) savings and consider if you are saving enough. Is that the right place to put your retirement savings? How much will your employer match?
New Rule: Safer to offer annuities inside 401(k)s
Companies now have more freedom to offer annuities inside 401(k) plans because the SECURE Act reduces risk to employers. Before, many plans avoided offering lifetime income annuities as investment options because they feared that the annuity carrier might go out of business and the plan would be held responsible. The easy way to explain the change is that a "safe harbor" was created and as long as the plan provider does due diligence in selecting the annuity provider, they won't be held liable.
Why is this important to you?
One of the hardest parts of retirement income is making your lump sum savings last throughout the rest of your life. Annuities are insurance products designed to turn a portion of savings into a lifetime income stream. You may want to consider using some of your 401(k) savings to purchase one of these insurance products if it makes sense. Annuities can get complicated, so this is definitely something you'll want to get some advice on as you plan your retirement income strategy.
New Rule: 401(k) statements will include “lifetime income disclosure”
Our next point is somewhat related to annuities: employee 401(k) statements must now include a "lifetime income disclosure" instead of what you usually see now, which is just your current lump sum amount.
The ability to see how much their savings would be when translated into a monthly income stream will hopefully help many savers plan better for retirement. You’ll see that lifetime income disclosure at least yearly in your 401(k) statement. That might wake some people up.
Of course it's impossible to know how long your retirement will last, and everyone retires at different ages. But these new disclosures will hopefully give people an idea of where they stand in terms of saving for retirement.
Now that last point about having an income stream in retirement may strike a chord and prompt you to ask,"What will specifically impact me and my plans for retirement?"
That’s what we will cover in our next post. Keys 2 and 3 will cover more about the new retirement rules and more specific ways they will impact you and your retirement plans!
If you have further questions, don’t hesitate to send me an email at email@example.com.
Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.
The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation. Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance.