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Six Key Retirement Changes of the Secure Act By: Carol Schmidlin

Six Key Retirement Changes of the Secure Act

By Carol Schmidlin

The Setting Every Community Up for Retirement (SECURE) Enhancement Act was signed into law by President Trump on December 20, 2019. This is the most extensive retirement act since the Pension Protection Act of 2006.

Here are the six notable key retirement changes that are effective January 1, 2020:

  1. Eliminates the age limit for making traditional IRA contributions. Under the old law, IRA contributions could no longer be made starting the year an individual turned age 70 ½.

Opportunities:

  • Back-Door Roth IRA benefit – This is a way for people with income that is too high to qualify for a Roth IRA contribution – to contribute to an IRA and then convert IRA to a Roth IRA. Prior to this law change, the year an IRA owner turned age 70 ½, they were not eligible to contribute to an IRA. Beginning January 1, 2020 people over age 70 ½ with income too high to qualify for a Roth IRA contribution can now contribute to an IRA, and then convert to a Roth IRA.
  • Expands the ability to do a spousal IRA contribution (for a non-working spouse) for spouses who are over age 70 ½, doubling the contribution for a couple.

Notes:

  • While the age limit for making traditional IRA contributions is eliminated, earned income is still required to make an IRA, Roth IRA or spousal IRA contribution.
  • IRAs are prorated to determine the taxable amount of the conversion. Example: John is 71 and wants to take advantage of the Back-Door Roth IRA. He contributes $7,000 to an IRA and then converts it to a new Roth IRA. Meanwhile, John has $500,000 in a pre-tax IRA. The pro-rata rules apply, so John’s IRA balance is $507,000 ($500,000 + $7,000 = $507,000), making 1.4% of the $7,000 conversion tax-free and 98.6% taxable.
  • Increases the RMD age from age 70 ½ to age 72 for all retirement accounts subject to Required Minimum Distributions (RMDs). This applies to individuals that have not attained age 70 ½ by December 31, 2019.

Opportunities:

  • Allows more time to do Roth conversions before RMDs begin. This can be very compelling for those who want to shift some of their taxable assets to tax-advantaged assets.
  • For Americans living longer, this may help their savings last throughout their retirement years. “A theoretical $500,000 portfolio, earning 5 percent annually, would have $33,500 more at age 89 if the RMDs started at age 72,” CNBC reported.
  • This provision does not change the age at which an individual can make a Qualified Charitable Distribution (QCD) from their IRA, which remains at age 70 ½. This creates a 1-2 year window where IRA distributions may qualify as charitable distribution, but not as RMDs, therefore reducing your income by the amount of your donation up to $100,000 per year.

Notes:

  • Participants no longer employed by the federal government will continue to be required to take RMDs from a Roth TSP. RMDs are not required from Roth individual retirement accounts (IRAs), which may be an incentive for some older plan participants to roll over Roth 401(k) funds into a Roth IRA.
  • Once RMDs begin, those RMDs cannot be converted to a Roth IRA.
  • Allows penalty-free withdrawals for birth or adoption, but the distribution is still taxable. Under the old law, there was no exception from the 10% early withdrawal if under age 59 ½.

Opportunities:

  • This exception applies to any distribution from the retirement account within one year from the date of birth or adoption.
  • Repayments to the plan are allowed and can be repaid (re-contributed back to the retirement account). The repayment will be treated as an eligible rollover.

Notes:

  • The limit is $5,000 lifetime distribution, not per year.
  • Applies only to children age 18, or physically or mentally disabled and incapable of self-support
  • My personal note is that retirement accounts should be used for your retirement and should only be touched as a last resort for any use, except for your retirement.
  • Eliminates the “Stretch IRA” by mandating inherited IRAs, for non-spouse beneficiaries, be withdrawn and taxes paid within 10 years. Exceptions are made for (1) surviving spouse, (2) minor children (not grandchildren) up to age of majority or age 26 if student, (3) disabled individuals, subject to IRS tax code, and (4) chronically ill, based on the tax rules for Long-Term Care Services, and beneficiaries not more than 10 years younger than the IRA owner, for example a sibling close in age will be able to stretch the IRA.

Notes:

  • This provision is not retroactive, so will not affect those who have inherited an IRA in 2019 or prior years. It applies to those who inherit on January 1, 2020 and after.
  • There are many people that name a trust the beneficiary of their retirement accounts. As long as the trust qualifies as a “see through trust,” the inherited IRA could be stretched over the oldest beneficiary’s lifetime, possibly for decades. The SECURE Act no longer allows that since the only minimum distribution is the end of tenth year – 100% of the account would come out and be taxed at that point. All inherited funds would be release to the beneficiaries, abolishing what the account owner wanted.

Critical Action Item:

  • If you have named a trust as your retirement account (IRA, 401k, etc.) as your beneficiary, you should review immediately and probably revise the trust or get rid of it altogether.
  • Encourages employer-based plans to offer annuities in their plan by providing liability protection for offering annuities. The provision provides a safe harbor for employer liability protection. The employer is still required to do due diligence as a fiduciary when selecting the insurance company and the annuity option. The employer is not required to select the lowest cost contract.

Note:

  • There are many annuities that offer lifetime benefits and still allow you the flexibility to take additional withdrawals if needed, as well as pass any remaining balance to your loved ones.
  • Allows Taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA or Roth IRA contribution.

There is a lot of information to understand and planning opportunities to consider.

Here are 5 Solutions and Opportunities to Consider:

  1. Re-Evaluate Beneficiaries
  2. Spousal rollovers can be more valuable for tax deferral
  3. If you listed a trust as a beneficiary, review immediately
  4. Tax Bracket Management
  5. Maximize low tax brackets
  6. Qualified Charitable Distributions if you are charity inclined
  7. Examine Roth Conversions
  8. Current lower rates under the Tax Cuts and Jobs Act are scheduled to sunset after 2025
  9. Is paying the tax worth it if the Roth can only last for 10 years after death?
  10. Life Insurance as an estate and tax planning vehicle
  11. Can replace all the benefits of a stretch IRA and IRA trusts
  12. Less tax for beneficiaries
  13. Avoid Trust Tax Rates by All Means
  14. Highest trust tax rate at present is 37% for income over $12,950

To request the complete white paper, 5 Solutions and Opportunities to Consider, click here.

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC

Advisory services offered through J.W. Cole Advisors, Inc. (JWCA)

Franklin Planning and JWC/JWCA are unaffiliated firms.

Franklin Planning takes no responsibility for the current accuracy of this information

The Retirement Process

It’s never too early to start planning for retirement to achieve the lifestyle that fits your dream. I like to start by determining your estimated “fixed” expenses in retirement and your “wants” expenses. What do you want to do in retirement (travel, take tennis, golf, cooking lessons, garden, exercise, dine out, spend time with family and friends, remodel home, garden, wine tasting, fishing, the world is your oyster!  Where are you planning to live? So many things to think about! Then look at your sources of income from your Social Security, FERS or CSRS annuity and TSP and other assets that you are accumulating for retirement, along with your contributions to TSP and other accounts to determine if you are on track to meet your goals. You will also need to include inflation and estimated rate of return to run this calculation.

While there are a lot of considerations involved with retirement the scope of this article is to focus on the retirement process to retire from your agency.  

What to do if you owe a deposit or a redeposit:

If you have periods of service where you were not contributing to CSRS or FERS for which you received a refund of your retirement contributions you should take action immediately so you can find out what it would cost you, including principal and interest, to make these payments back before retirement. It may take a year to get this information so make the request well ahead of your planned retirement date to maximize your benefits.  Civil Service Retirement System (CSRS) completeSF 2803 or Federal Employees Retirement System (FERS)  SF 3108 to get the periods of service during which you either did not contribute to the Civil Service Retirement and Disability Fund, or for which you received a refund of your retirement contributions. You will submit this to your Human Resource Office (HRO) or your Agency Benefit Office.

What to do if you want to make a deposit for military service:

In most cases if you are eligible for military pay you cannot use your military service to add credit to your annuity. You must make a deposit prior to the date of retirement. Processing time requires approximately 120 days so plan accordingly.

1.      You must complete RI 20-97, Estimated Earnings During Military Service, and mail it to the appropriate military finance center (click here for the mailing addresses), with a copy of all DD Forms 214.

2.      Once you receive your estimated military earnings, complete the Application to Make Service Credit Payment SF 3108(FERS) or SF 2803 (CSRS).  Mail the application along with your completed estimated military earnings and DD Form 214 to the appropriate Military Finance Center.

Processing Your Retirement Paperwork

We recommend within a year of your planned retirement date you start working with your Human Research Office (HRO) or Agency Benefit Office. Do not get alarmed if you do not have a Human Resource Office or Benefit Office on site at your agency. In fact, most agencies benefit offices are offsite. For a list of agency benefit offices go to https://apps.opm.gov/abo/.

Here is a step by step guide to processing your retirement paperwork:

1.      Complete an application for retirement: FERS SF 3107, CSRS SF 2801 and compete SF 2818 FERS and CSRS, continuation of life insurance in retirement, and mail to your Agency Benefit Office or your onsite HRO office if they do retirement processing. It is suggested that you FEDEX, DHS or UPS, although this is not a requirement.

2.      If you are married and electing less than a full survivor benefit, your spouse must consent by signing SF 3107-2 for FERS and SF 2801-2 for CSRS in the presence of a notary, before submitting your application.

3.      If you are married submit a copy of your marriage certificate.

4.      Complete beneficiary designations for the lump sum payment of retirement contributions when no one is eligible for benefits. FERS form is SF 3102 and for CSRS form is SF 2808. If you are not sure if you previously completed this form, complete the beneficiary form anyway which will supersede any previous designation.

5.      Get completed forms to your benefit office 60 days prior to your planned retirement date or as your agency dictates.

6.      Your retirement application is then forwarded to your servicing payroll office which will close out your payroll record, verify for OPM to complete your contributions to the retirement fund, calculate your lump sum leave payment, and complete other payroll actions.

7.      Your payroll office then forwards the application package to OPM.

8.      OPM makes a final determination on your retirement eligibility. Upon confirmation of your eligibility, they will send you interim payments until your annuity calculations are finalized. Your interim payments are usually between 60 to 80 percent of your estimated final annuity and do not include the FERS Supplement (if applicable).

9.      You can expect to receive your interim payment 4 – 6 weeks after you retire. You will receive a Civil Service Annuity (CSA) number from OPM that identifies your application and should use your CSA number when contacting OPM regarding your annuity.

10.  Your interim payments are subject to federal income tax withholdings. Premiums will not be withheld for health or life insurance, although these benefits will continue and will be brought whole once your annuity is finalized. You should make arrangements with www.benafeds.com and www.ltcfeds.com to make premium payments during the interim period.

11.  When OPM receives your retirement application from your agency, they will mail you a welcome letter, along with a retirement card, which contains your CSA number. It’s a seven-digit number and will be included on all correspondence from OPM. You will also receive a password which will give you access to your annuity atwww.opmservicesonline.com.

12.  You can use Services Online once you have received your claim number and temporary password to:

·         View the Status of Case while in Interim Pay

·         View/Print 1099-R Tax Forms

·         Change Federal and State Income Tax Withholding

·         View/Print Annuity Statement/Verification of Income

·         View/Print a Year-to-Date Summary 0f Payments

·         View/Print Verification of Life Insurance (FEGLI)

·         Change Mailing Address

·         Change SOL Password

·         Establish an Allotment to an Organization

·         Request Duplicate Annuity Booklet

·         Set up a Checking or Savings Allotment

·         Sign up for Direct Deposit of Annuity Payment

·         Update Email Address/Opt-in to Receive Information Electronically

·         View/Print Retirement Services Reference Card (ID Card)

Good luck on your Retirement Journey!

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