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Inside the SECURE ACT: How New Law Could Impact Your Money, Your Savings Habits and Your Retirement

Posted by admin on 02/01/2020 12:00 am  

When the SECURE Act became law in late 2019, it was widely hailed as a step forward for people seeking greater financial security and flexibility in retirement.

“Passing the SECURE Act is a big victory that will help ensure that all hard-working Americans have a chance to build a nest egg for their retirement,” said Ohio Republican Sen. Rob Portman, who devised and championed some provisions of the law.

Prudential, a large insurance company that offers a range of retirement savings vehicles, said the law “contains the most significant legislative enhancements to the private-sector retirement system in over a decade and will improve the retirement readiness of millions of Americans.”

As broadly lauded as the SECURE Act (the tidy acronym stands for Setting Every Community Up for Retirement Enhancement) was upon its passage, whether it has the desired impact in helping to remedy America’s retirement savings shortcomings likely won’t become clear for some time. Many of its provisions took hold Jan. 1, 2020. The law is widely viewed as an incremental policy step toward giving retirement savers greater means and incentive to create a secure financial future for themselves, but hardly a panacea for an overall savings shortfall that today has many people financially ill-prepared for retirement.

“There is still more that we can do to help more Americans save for their retirement,” Portman said in a statement. “I believe that passage of the SECURE Act can help pave the way for bolder reforms in legislation.”

As for how the law will impact people and families, FPA member and CERTIFIED FINANCIAL PLANNER™ professional Kristin McKenna of Darrow Wealth Management in Concord, Mass., said it’s too early to tell. “It’s going to depend on a person’s individual circumstances, and a lot of people may not feel any impact for a while. The folks who I expect will feel its impact the soonest will be those who are nearing retirement.”

Whether you’re a person for whom retirement is a current reality, an approaching likelihood or a remote, decades-away consideration, chances are strong you’ll be affected to some extent by the SECURE Act. What exactly is in the new law? Which of its provisions will affect whom, and when? Here’s a look at some of the key aspects of the law, with insight from a handful of CERTIFIED FINANCIAL PLANNER™ professionals on their potential impact. 

Lifting of the age limitation on contributions to a traditional IRA. Under previous law, a person could only contribute to a traditional IRA up until age 70½. Under the SECURE Act, people can continue to make IRA contributions regardless of age, provided they continue to earn income from employment. This adjustment reflects a trend in which people are choosing to work past traditional retirement age; it also aligns traditional IRA contribution rules with rules for 401(k)s and Roth IRAs.

Increasing from 70.5 to 72 the age at which people with qualified retirement accounts [traditional IRAs, 401(k)s, etc.] must begin taking required minimum distributions (RMDs) from those accounts. With this provision, which applies beginning with people who turn 70.5 in 2020, retirement savers gain additional latitude in managing their retirement account withdrawals. They also gain additional time for the assets in those accounts to potentially increase in value. “This is a very positive change for most of our clients,” said FPA member Amy Shepard, CFP®, with Sensible Money, a financial planning firm in Scottsdale, AZ. “It gives them an extra 18 months to defer the tax implications of RMDs, which opens up more flexibility for tax-efficient planning.” For example, she notes, people will have additional time to convert assets in traditional retirement accounts to Roth assets.

Eliminating the lifetime stretch provision for people who inherit a retirement account, and replacing it with a 10-year window for taking distributions from those inherited accounts. Under prior law, a person inheriting an IRA or 401(k) had the option of “stretching" the distributions they take from that account over their lifetime. Effective in 2020, the new rules require these inheriting non-spouse beneficiaries to withdraw assets from the inherited account within 10 years of the original account-holder’s death.  There are notable exceptions to the new 10-year requirement, however. It does not apply to a surviving spouse, nor to a minor child, a disabled or chronically ill beneficiary, or to beneficiaries who are less than 10 years younger than the original account owner.

Despite those exceptions, some financial professionals say the demise of the lifetime stretch provision for inherited retirement plans could complicate tax planning for people inheriting a retirement account. “For those consumers who expect to inherit assets from their parents at some point, this can have a major impact on their tax situation,” said Shepard, “especially those consumers who are nearing retirement themselves and trying to manage their own taxes closely.”

The SECURE Act did provide inheriting beneficiaries with flexibility in when they make retirement account withdrawals within that 10-year window, she noted, by eliminating annual RMDs from those inherited accounts and instead allowing inheriting beneficiaries to take distributions at their own pace, as long as the entire amount in the account is drawn down within the required 10 years.


Giving long-term, part-time workers the opportunity to participate in a defined-contribution plan. Under prior law, people who worked less than 1,000 hours per year generally were ineligible to participate in their employer’s defined-contribution [401(k), etc.] retirement plan. The SECURE Act requires employers that offer a defined-contribution plan to provide access to their plan to long-term, part-time workers who work at least 500 hours each year for three consecutive years and are age 21 or older. That three-year lookback window opened as of Jan. 1, 2020, meaning 2024 is the earliest that qualifying part-time employees can start benefitting from the provision, according to McKenna.

Creating opportunities for retirement plan sponsors to offer workers more lifetime income vehicles inside retirement accounts. With the decline of pension plans, Americans have been seeking ways to turn their retirement account assets into a guaranteed income stream for retirement. The SECURE Act opens the door for retirement plan sponsors to include new options for plan participants to convert plan assets into retirement income via annuity-like vehicles. Employers had been reluctant to offer these so-called “in-plan annuities” because of potential liability issues if the annuities failed to perform as promised. The new law addresses that concern by giving employers a “safe harbor” that protects them from liability when offering an in-plan annuity to employees. It also gives these in-plan annuities portability, whereby employees, if they switch jobs, can transfer their annuity to another plan without incurring surrender charges or fees.

Making it easier for smaller businesses to participate in multi-employer retirement plans so they can offer their employees access to retirement accounts. This provision seeks to relieve small businesses of the high administrative cost burden associated with offering a retirement plan to employees. It allows otherwise unrelated small employers to participate in open multi-employer plans (MEPs) so they can offer their employees a retirement plan while sharing plan administrative costs and responsibilities with other employers in the MEP. The SECURE Act also protects companies participating in an MEP by removing the so-called “one bad apple” rule under which all employers that are part of an MEP could face adverse tax consequences if one employer MEP participant failed to meet certain requirements.

Increasing the cap for employee auto-enrollment contributions to an employer-sponsored retirement plan from 10% of pay to 15% to encourage greater employee retirement savings. Employees whose workplace retirement plan has automatic enrollment now can have up to 15% of their pay automatically directed into their retirement plan.

Allowing parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of the birth or adoption of a child to use those funds to cover qualified expenses. While this SECURE Act provision gives new parents additional financial flexibility, McKenna said she’s “not a big fan” of people tapping their retirement accounts prematurely unless there’s a financial emergency and the person has no other alternative. Otherwise, the person is better off leaving that money in their retirement account, where it has the potential for compounded growth over the long-term.

Allowing parents to withdraw up to $10,000 from tax-favored 529 education savings plans to repay student loans. This provision “makes a ton of sense,” said McKenna. “To have the option of using the extra money in a 529 plan to pay down a student loan debt, I think, is a great value-add” for plan participants. The provision carries a lifetime limit of $10,000 per beneficiary and $10,000 per each of the beneficiary's siblings.

Expanding 529 college plan eligibility to include apprenticeship programs. Under the new law, funds from 529 plans can be used to cover the cost of registered apprenticeship programs, a boon for the hundreds of thousands of people who opt to pursue apprenticeships instead of college. McKenna said she endorses the change. “This should have been done a long time ago.”

 

February 2020 — This column is provided by the Financial Planning Association® (FPA®) and FPA of Nebraska, the principal membership organization for Certified Financial PlannerTM professionals.

FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide members with tools and resources for professional education, business support, advocacy and community, FPA advances financial planning practitioners through every phase of their careers, from novice to master to leader of the profession. Please credit FPA of Nebraska if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.


To Rent or Own a Home? Guidance to Decide What’s Best for You

Posted by admin on 02/01/2020 12:00 am  

Owning a home has long been considered an integral part of the American Dream, something to aspire to and, at least in general terms, a viable course of action for people seeking to own a hard asset whose value potentially may appreciate significantly over time. But changing market dynamics — rising home prices, uncertainty about interest rates and the like — along with peoples’ shifting priorities have raised new questions about home ownership and how exactly it fits in today’s version of the American Dream.

 This article is the first in a series of four developed by the Financial Planning Association® (FPA®) to provide answers to some of those pressing questions by exploring issues such as purchasing vs. renting a home, the home purchasing process for first-time home buyers, maximizing the value of a home as an asset, and ways to fund a home remodel/renovation.

 The first article tackles the “Rent or own?” question, with insight from CERTIFIED FINANCIAL PLANNER™ professionals who are members of FPA.

 

What’s best, owning a home or renting one?

The answer: It depends — on a person’s stage in life, geographic location, priorities, financial circumstances and other considerations.

First, some facts to consider. In its 2020 Rental Affordability Report, ATTOM Data Solutions found that owning a median-priced, three-bedroom home is more affordable than renting a three-bedroom property in 455, or 53%, of the 855 U.S. counties it analyzed. It also found that home ownership is “more affordable mainly in lightly populated counties and renting more affordable in more populous suburban or urban areas.”

Those figures suggest that before deciding which course to take, it’s important for people to research the real estate market dynamics in the specific area in which they are considering buying or renting a home, and consult a realtor or rental agent if they want more insight into those dynamics. “People need to dig deep so they know the actual cost of owning a home in the area they’re considering,” says FPA member and CERTIFIED FINANCIAL PLANNER™ professional Henry Hoang of Bright Wealth Advisors in Newport Beach, CA. “Run multiple scenarios that are realistic and conservative to form a sound conclusion. When running the scenarios, you need to plan for many what-if’s such as home repairs, an unexpected decrease in income, or additional expenses from a growing family. The more clarity you have when running projections, the higher your probability in making the correct decision.”

To find that clarity, consider engaging a financial professional to help run the numbers, weigh all the factors and guide you to a sound decision. To find a CERTIFIED FINANCIAL PLANNER™ professional who works in your area, visit FPA’s searchable national database at www.PlannerSearch.org.

You could be a good candidate to BUY a home…if you intend to stay in the home for five to seven years or longer; if you want to own an asset whose value will potentially increase over the long term; if you want to take advantage of the prevailing low mortgage rate environment; if you have the patience, perspective and wherewithal to weather real estate market cycles in which the value of the home could potentially drop substantially (but also appreciate substantially); if you have the comfort level, financial wherewithal and credit history to take on a mortgage, make monthly payments and pay off the loan in a timely fashion; if you have the resources and the wherewithal to maintain the home, covering the cost of repairs and upgrades as needed, as well as other potential costs, such as homeowner association fees; if you are able to take advantage of tax breaks that come with home ownership; if you plan to treat the home as a short-term investment, to fix up and sell; and, if you want an asset whose value you can tap to generate liquidity for other needs.

Purchasing a home is a major commitment, financially, logistically and even psychologically. Financially, today’s relatively low mortgage rates can make purchasing a home more appealing and attainable. The real estate website Zillow predicts that mortgage rates will remain near their current levels “for the bulk of 2020.”

Federal tax policy has long allowed homeowners who itemize their tax deductions to claim the mortgage interest and property taxes they pay each year as tax deductions. However, recent tax policy developments limit the deductibility of those expenses, thus making home ownership financially less appealing for some.

If your plan is to stay in the home for at least five to seven years, owning a home “is usually the better choice,” says FPA member John R. Power, CFP® based in Walpole, MA. “It becomes a home and not just a place to live. It typically gains value over time, but will almost always gain in equity. And it may actually be less costly than a rental of equivalent size” in terms of total cost of ownership.

Home ownership comes with responsibility for upkeep and repairs. People who are willing to invest the time and money to maintain and perhaps improve their home may find they can earn a significant return on that investment, as real estate assets generally tend to appreciate in value over the long term, particularly properties that are well-maintained and/or improved (such as via a remodel). There’s also the short-term fix-and-flip option, where people purchase a home, upgrade it and sell it with the goal of earning a quick profit on the sale.

Though home values do tend to increase over time, homeowners must be aware that real estate markets are cyclical. There’s a very real risk that their home could lose value. But unless they sell the home when its value is depressed, that drop in value is only a number on paper. The historical cyclicality of real estate markets suggests that the home will eventually regain lost value and continue to appreciate.

As a home appreciates in value, it gives the homeowner the ability to tap that added value — called equity — and turn it into a cash resource. The equity in a home can be used to fund a home equity loan or home equity line of credit, each of which can be used constructively, such as to help fund a home remodel project, a child’s education or to meet an emergency cash need.

You could be a good candidate to RENT a home…if you intend to move within five to seven years; if you lack the financial means and/or desire to take on a substantial debt; if your credit score/credit history makes it difficult to secure a mortgage with reasonable terms you can afford; if you’re moving to a new area and want to get a feel for it before committing to buying a home there; if you prefer not to assume responsibility for maintaining and repairing a home; if you’re willing to live according to the rules established by the property owner/landlord; if you’re comfortable assuming the risk that your rent could increase year to year, sometimes significantly, along with the risk that the landlord from which you rent (or the property manager) may not be as responsive as you expect in maintaining/repairing the home, as well as the risk that the landlord could decide to terminate your lease with little notice; if you prefer to use your money for other constructive purposes, such as to invest or to save toward retirement or a child’s education, and lack the resources to do all these at once.

Before determining which path to take, first consider your expectations with regard to where you live. “If you are not planning to live in the new home for longer than five years,” says Hoang, “the safer bet is to rent. With all the costs associated with buying and selling a home combined with high levels of economic uncertainty today, most people would be better off renting if they are looking at a shorter-term time horizon.”

From a cost perspective, rent increases are a fact of life for many renters. Zillow expects annual rent appreciation to hover around 2.3% for the first part of 2020. However, “by the end of [2020], we expect annual rent growth to fall below two percent.” Still, renters must account for the possibility of annual increases in monthly rent.

Don’t let stigmas about renting impact your decision, says FPA member Jake Northrup, CFP®, CFA, CSLP® who heads the financial planning firm Experience Your Wealth in Bristol, RI. “The belief that ‘rent is throwing money away’ is so far from true…Buying a home isn’t always the right thing to do. It ties back to what you value and how it impacts your other priorities.”


He suggests that before making the call on whether to rent or buy a home, that people consider opportunity cost: what they would otherwise do with the money required for the down-payment, mortgage closing costs and other costs associated with buying a home. Perhaps they’d prefer to use it in pursuit of some other important goal, such as paying for graduate school, paying down a burdensome college loan or large credit card debt, building out an investment portfolio, starting a business or even funding a year-long sabbatical from work, for example.

Lifestyle flexibility is another factor to weigh. “Life can change quick and you don’t want to feel held back by a certain asset,” Northrup adds. “You may want to live in a few places, change jobs, start a business, etc. Renting allows you to adjust your housing situation to directly accommodate changes in your financial situation. The bank is not going to say, ‘Hey, you can start paying 20% less in mortgage payments so you can start a business.’ However, you could move to a new area or reduce your space to pay 20% less in rent so you can start that business.”

CLICK HERE to read part 2.

February 2020 — This column is provided by the Financial Planning Association® (FPA®) and FPA of Nebraska, the principal membership organization for Certified Financial PlannerTM professionals.

FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide members with tools and resources for professional education, business support, advocacy and community, FPA advances financial planning practitioners through every phase of their careers, from novice to master to leader of the profession. Please credit FPA of Nebraska if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.