The SECURE Act went into effect earlier this year, causing a stir throughout the advisor world. The new act changes several existing details regarding how you and your clients approach their retirement planning. In this article, we’ll break down the significant points and critical aspects of the SECURE Act and then take a look at how these changes might affect some of your clients, especially those who have trust funds.
SECURE Act at a Glance
While there is a litany of details surrounding the changes under the new SECURE Act, we’ve found that these are the cornerstone elements relevant to you (financial advisors and planners) when it comes to your clients’ retirement planning.
- The maximum age for traditional IRA contributions is now repealed. Was previously 70 ½
- The required minimum distribution age (RMD) for retirement accounts is now 72
- The new act allows long-term, part-time workers to participate in 401(k) plans
- There are now more options for lifetime income strategies that are offered
- It will enable parents to “withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses.”
- It also permits parents to “withdraw up to $10,000 from 529 plans to repay student loans.”
These factors could play a massive role in how you approach some of the finer points of your clients’ retirement planning, creating many new avenues for you to do more business. Before we dive into what some of these opportunities look like, let’s take a brief look at some other details that we think you might find relevant when it comes to your clients’ retirement planning.
Further Details of the SECURE Act
Under the new SECURE Act, small-business owners have a new mechanism that can help ensure their long-term financial security without sacrificing their business’s current success. According to sources, “small-business owners can receive a tax credit for starting a retirement plan, up to $5,000.” On top of this, small-business owners will now have smoother channels and means of access when it comes to joining together to offer “define contribution retirement plans.”
The new act also “encourages retirement saving by raising the cap for auto-enrolment contributions in employer-sponsored retirement plans from 10% of pay to 15%.” This means that if your plan offers auto-enrollment, “the amount withheld from your retirement savings could go up every year until you’re contributing 15% of your pay to your retirement savings plan.”
Furthermore, the New SECURE Act permits “lifetime income investment” to be distributed from your workplace retirement plan. According to the act, “the retirement income options would be portable.” This means that if you left your job, you’d still be able to roll over this amount to another 401(k) or IRA.
There will now also be an Increase in transparency into retirement income with “lifetime income disclosure statements.” These would show the amount of money you could potentially receive every month if your “total 401(k) balance were used to purchase an annuity.” With this, you and your client can better gauge what your potential income would look like in retirement.
Does The SECURE Act Benefit or Hurt your Clients?
For a majority of your clients, the new SECURE Act will most likely end up benefiting their retirement goals. Here’s how:
- If your client is turning 70 in 2020, the new rules can help delay their need to spend their savings
- The new retirement savings plans can also help young families
- Allows your clients to work and save more going into their 70’s
- The new act means working part-time won’t hurt your ability to save
- Provides a valuable wake up call to several clients across the board
With these positives in mind, it’s essential to bring up that the new law can be potentially problematic for your clients that are trust-owners, considering that “most trusts are now subject to the 10-year, post-death payout.”
How the SECURE Act Affects Trust Owners
As most of you know, clients who have large IRAs will often name trusts as their beneficiaries to gain post-death control to prevent money being squandered or being at risk of “financial mismanagement, lawsuits, or predators” and because they want to minimize taxes.
With the new act, certain mechanisms will change with the way that conduit trusts and discretionary (accumulation) trusts are paid out. With the old rules, “payouts from the inherited IRA to the trust could be stretched over the lifetime of the oldest trust beneficiary.”
With conduit trusts, under the old tax rules, “the annual RMDs get paid out from the inherited IRA to the trust and from the trust to the trust beneficiaries.” These funds are then taxed at the beneficiaries’ own personal tax rates. For pre-SECURE Act discretionary trusts, the trustee has more “post-death control of what gets paid to the trust beneficiaries,” and any funds “retained in the trust would be taxed at high trust tax rates.”
However, under the new rules, a conduit trust will no longer offer post-death control and tax minimization because the new law gets rid of RMDs. This means that “there may be no payouts until the end of the ten years, and then all the funds are released to the trust’s beneficiaries,” which is what your clients with large IRAs are trying to protect against. On top of this, all the taxes will aggregate into the last year, which renders this method of trust planning mostly ineffective.
Discretionary trusts will still maintain some viability because the funds can be retained in the trust after ten years, but they will still be subject to high trust tax rates.
Several experts have stated that a potentially better option if your client wants a trust, would be “to have the client convert to a Roth IRA and leave the Roth IRA funds to a discretionary trust providing the post-death control and eliminating trust or personal taxes.”
The new law also contains provisions that allow a trust “to be set up to inherit retirement funds for the benefit of a disabled or chronically ill individual.” However, the law does not specify trusts for spouses, minors, and those within ten years of the age of the deceased.
What this means for Advisors and their Clients
The new SECURE Act signals a need for you, the advisor, to sit down with your client and go over their retirement planning. This law was created to provide more options for retirement savers’ but as we’ve discussed, it also drastically changes IRA trust planning.
This shouldn’t be taken as a negative though. Even with clients with trusts, it provides a number of avenues for you to create more valuable work in the new year. Experts have laid out several alternate options for trusts that you should bring up with your clients, including:
- Naming the spouse as the beneficiary
- Roth conversions at low tax rates
- Life Insurance — more substantial inheritance, less tax
- Qualified Charitable Distributions
So, while the new law shakes up the landscape, it should also provide many creative ways for you to deliver more value to your clients. At AssetBook, we’re constantly building tools and technology that can help you easily navigate the technical aspects of portfolio management so that you can improve your clients better understand the story behind their financial data. If you’re interested in learning more about our new AssetBook 2.0 platform and what it can do for you and your clients, give us a call at (301) 387-3238 ext.1 or book a time to speak to one of our representatives here.