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How SECURE Act Changes Retirement And What You Should Do To Plan

The following is a Q&A with Brian Pirri, Principal, and Glenn DiBenedetto, Director of Tax Planning, at New England Investment & Retirement Group ($600M AUM) weighing in on the notable takeaways on the increase in RMD to 72 and the ease of rules for multiple employer gains (MEPs). Also the Senate’s proposed Retirement Enhancement and Savings Act and how it differs from the SECURE Act.

SECURE Act
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Can you tell us about your background?

Brian Pirri is a Principal at New England Investment & Retirement Group with 20 years of experience in the financial services industry. He is a CERTIFIED FINANCIAL PLANNER™ professional and is also a member of the Financial Planning Association (FPA). Brian helps NEIRG clients achieve their financial goals by creating, implementing, and monitoring customized investment and wealth management plans that address their financial needs.

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What is the SECURE Act?

The SECURE Act stands for Setting Every Community Up for Retirement Enhancement Act. The legislation has been approved by the House of Representatives to improve retirement savings options

How does it differ from the Retirement Enhancement & Savings Act (RESA)?

The Retirement Enhancement & Savings Act is a piece of Senate legislation very similar to the SECURE Act, but the proposals differ in how they address “stretch provisions.” As it stands, the SECURE Act eliminates stretch provisions, changing the rules for withdrawing from an inherited IRA. I anticipate the final legislation will likely incorporate elements of both.

It’s rare to see legislation with such bipartisan support, why do you think we are seeing that here?

Foremost, there are benefits across income classes. The wealthy can add to tax-deferred wealth. The legislation eliminates the 70 ½ IRA age maximum, delaying required minimum distributions (RMDs) and increases the deferral cap from 10 to 15% for employee deferrals. Additionally, the elimination of the IRA age maximum of 70 ½, portability and simplified rules should benefit the less affluent, as well.

The simplification of formation and administration rules will also be beneficial for small employers.

How big of an impact would either of these have and how would it impact regular Americans?

I don’t think the changes will impact the average American’s retirement savings significantly. Most will continue to contribute the same amounts they have in the past.  However, the reduced red tape and incentives for small employers to establish retirement plans will likely improve opportunities for their employees to save more effectively for retirement.

Most Americans cannot contribute anywhere close to the maximum, so how would these bills help?

Again, I don’t believe these bills will have a major impact on the average saver, but the pieces around delaying required minimum distributions (RMDs) and increasing the age to contribute to an IRA will certainly help.

Many Americans have small 401ks/RIAs, how would this legislation help increase contributions?

I’m not confident that the average employee will increase contributions, but higher income earners will likely take advantage of the increased deferral cap from 10 to 15% of employee pay. The legislation’s creation of opportunities for part-time workers will also likely help people increase contributions. In addition, as mentioned above, allowing people (who are still working) to contribute past 70 ½ will provide a boost to retirement savings.

What will the impact be on the broader small business economy?

Small businesses offering retirement plan benefits to employees and potential employees will be more competitive in this tight employment market. The SECURE Act will allow certain employers to join multiple employer defined contribution plans (MEPs). A MEP is a plan maintained by two or more employers who are not related, providing small employers with plan features and benefits more often available to larger employers.

Will it impact the growing numbers of 1099 workers?

I do not see a great benefit to the average 1099 worker as the current Savings Incentive Match for Employees (SIMPLE) and Simplified Employee Pensions (SEP) plans are painless to establish and administer.

How will it affect underfunded pension plans?

It is too early to determine the impact of the legislation, if any, on underfunded pension plans.

Does the legislation have any relation to recent Fiduciary changes?

The Department of Labor’s Fiduciary Rule is predominantly about ensuring that retirement advisors act in the best interests of their clients and put their clients’ interests above their own. Several of the proposals in this bill deal with more fiduciary oversight, such as the requirement to include a lifetime income disclosure (monthly income stream) on benefit statements, the fiduciary safe harbor for selection of the lifetime income (annuity) provider, allowing portability of lifetime income options, and easing rules pertaining to multiple employer plans to allow smaller employers to band together (where the plan serves as fiduciary versus each employer).

If you could craft legislation for helping retirement assets, what would you recommend?

Many of the financial issues facing our country today stem from a failure to save enough for retirement. A few legislative ideas that could make sense are:

  • Making IRA contribution limit amount requirements more in line with 401k’s. I’ve never understood why the limits on IRAs are much smaller at $6,000 per year versus a deferral of $19,000 in 401k plans. Many people don’t have the ability to contribute to a 401k so increasing IRA limits would help.
  • Allowing a spouse to make a deductible IRA contribution even if the other spouse is covered by an employer plan. Right now, if either spouse is covered by a plan at work and their joint income is over $203k, there is no deduction allowed for an IRA contribution.
  • Increasing the income limits for the opportunity to receive a saver’s credit on your taxes for making retirement plan contributions.

What advice would you give to a young person starting work today who wants to build a large egg nest for retirement?

I would recommend that a young person start saving right away and increase their contributions every year. A few other suggestions include:

  • Take advantage of your company 401k match and contribute at least up the maximum to get the match. Look to increase this every year by reallocating a raise or bonus directly to your 401k savings.
  • Make sure to invest your 401k plan for maximum growth at a younger age. This means a higher allocation to equities.
  • Aim to save at least 15% of your salary each year.
  • Limit your spending, keeping an eye on your budget. Set a limit, such as aiming to spend no more than 50% of your take-home pay on essential expenses including housing, food, utilities, debt, transportation, etc.
  • Take a percentage of your take-home pay (5% to start) and allocate to an emergency savings fund to cover at least 3-6 months of living expenses.
  • Consider saving in an IRA or a Roth IRA if you don’t have access to a 401k plan. If you’re self-employed, consider saving in tax-advantaged accounts such as a SEP-IRA or Simple IRA.
  • Take advantage of work sponsored flex spending accounts (FSA), health savings accounts (HSA), or dependent care savings plans if they are offered.
  • Set up an automatic savings plan from your checking account to a brokerage account every month. If you don’t see it, you won’t spend it!