What happens when the interests of insurance-company lobbyists and politicians converge? The answer is called the Setting Every Community Up For Retirement Enhancement Act (SECURE). For many years, insurance companies have fretted over the loss of business caused by the non-competitiveness of annuities in a low-interest-rate environment. Furthermore, the increase in the amount of assets that can be passed free of estate taxes has removed the need for moderately wealthy retirees to buy life insurance to cover their estate-tax bills. The SECURE act requires all defined contribution plans (401k, 403b, 457 etc.) to “include a lifetime income disclosure at least once during any 12-month period.”* In other words, an annuity option that converts balances into a lifetime stream of income to retirees and/or their spouses. SECURE is a win for insurance companies that become the de facto beneficiaries of everyone who buys a life annuity.
For Congress, SECURE helps recover some of the estate taxes lost from those who have estates of between $1 million and $11 million. These individuals make up the bulk of the “rich” who often have most of their assets in their houses, savings, and most importantly, in their retirement plans. The SECURE Act helps Congress recover some of these lost tax dollars by doing away with the Stretch IRA. Previously, beneficiaries could establish a beneficiary IRA and take distributions over their lifetimes. Now, beneficiaries, with the exception of spouses, must take distributions and pay taxes within ten years of the original owner’s death. For those whose children are in high tax brackets, much of the balance could be lost to taxes, since the distributions would add to their incomes. This is another victory for insurance companies, since the desire to pass assets to heirs provides the opportunity to sell life insurance to retirees and the elderly. Congress will accelerate the collection of taxes and replace some of the lost income from estate taxes. In Washington, this is called a “win-win.”
There are positives to SECURE. For those who need to or want to work until age 72, they can still contribute to their plans if they have earned income. Required Minimum Distributions (RMDs) will now start at 72 instead of 70-1/2. Accelerated withdrawal exemptions include minor children, but not grandchildren, children up to the age of 26 who are in school, the disabled and the chronically ill. The idea that a 16 year-old orphan could be forced to liquidate a $1 million IRA over ten years beginning at age 18 sounds to me like a nightmare scenario calling for serious estate planning.
Other improvements include tax credits for start-up costs in order to entice small businesses to establish plans, greater access for the numerous part-time workers in our economy, easing of automatic enrollment rules, and numerous other provisions that should make plans easier to start and more available for many.
The Act could easily be called the Insurance Salesperson, Tax Attorney, Accountant, and Financial Planner Full Employment Act, but ISTAAAFPFE is a lousy acronym. In any event, those who are aware of the rules and plan accordingly will minimize any negative consequences, assuming that they don’t seek advice from a commissioned salesperson looking to sell insurance.
* The Setting Every Community Up For Retirement Enhancement Act of 2019 (The Secure Act).“ House Committee on Ways & Means, 05/23/2019. TITLE II, Sec. 203. Disclosure Regarding Lifetime Income. https://www.congress.gov/bill/116th-congress/house-bill/1994/text. Accessed: 01/08/2019.