Retirement Policy Updates
Retirement Legislation – SECURE Act was signed into law on December 20, 2019 and goes into effect on January 1, 2020.
The SECURE Act, a bill aimed at encouraging more efficient retirement savings, passed the Senate on Thursday as part of the government spending bill.
The significant changes of this bill include:
- Making it easier for small businesses to establish and enroll employees in 401k plans
- Making it easier for 401k plans to include annuities as an investment option
- Increasing the age at which Required Minimum Distributions start from 70.5 to 72
- Allowing 529s to be used for $10,000 (lifetime) of student loan repayment
- Require IRAs inherited by non-spouses to be distributed within 10 years of receipt, rather than over a lifetime as under present law
- Removing the age limit on traditional IRA contributions
Medicare – Changes to Medigap, but only for newly eligible individuals
Medigap Plans F, C, and High Deductible F will no longer be available to people who turn 65 on or after January 1, 2020. (Technically, the plans won’t be available for anyone who becomes newly eligible for Medicare on or after January 1, 2020. In most cases, people become eligible on their 65th birthday. The only exceptions are people with long-term disabilities, kidney failure, and recent immigrants to the U.S. ) For reference, Plan F is the most comprehensive Medigap plan, covering all potential Medigap benefits. It’s also the most popular, covering 55 percent of enrollees in 2017. (America’s Health Insurance Plans. “State of Medigap 2019” (May 2019). https://www.ahip.org/wp-content/uploads/IB_StateofMedigap2019.pdf) Plan C is nearly the same as Plan F, only excluding coverage of Part B excess charges (extra charges incurred by a small number of doctors who accept Medicare but charge more than the Medicare-negotiated price for care). High deductible F is just as described, Plan F with a $2,340 deductible, meaning your Plan F benefits don’t kick in until you’ve paid $2,340 in medical expenses that year.
What should you do?
If you are already 65 or will turn 65 before the end of the year, you do not need to do anything. These plans will remain available to anyone who is already 65 in 2019, even if they haven’t yet signed up for Medicare. (See citation (1).)
If you are younger than 65 and near retirement, you can replace the popular Plan F with Plan G, which has nearly all of the same features. It only excludes coverage of the $198 per year Part B deductible (meaning you’ll have to pay $198 each year in doctor expenses before your coverage kicks in). In addition, we expect that a high deductible version of Plan G will also be introduced, which will replace the High Deductible F plan. The replacement for Plan C is the already-existing Plan D, which is the same except for coverage of the Part B deductible.
As a reminder, United Income’s software models over 300 combinations of Medicare to help you find the ideal coverage. You can use this tool yourself by logging into your account, or your wealth manager can help you find the coverage that best suits you.
Social Security Updates
Cost of living adjustments (COLA) were announced in October 2019, which will increase benefits for Social Security beneficiaries by 1.6% starting in 2020. Please note that the United Income software automatically includes these types of future cost of living adjustments in your financial plan and projections available in your account.
The maximum taxable wages for Social Security increased to $137,700 for 2020 up from $132,900 in 2019. The employee tax rate for Social Security remains at 6.2% (12.4% for Self-employed). Please note that the United Income software also automatically includes this and other expected future tax adjustments in your financial plan and projections.
The Maximum Full Retirement Age Benefit will also increase to $3,011/mo in 2020 up from $2,861/mo in 2019. This is the maximum benefit a high-income earner can receive from Social Security if they claim at their Full Retirement Age.
If you are interested in learning more, please ask your wealth manager, who can connect you with one of our Social Security experts on the United Income team.
As a reminder, the United Income software can run up to 81 different scenarios to help you and your partner (if relevant) find the optimal Social Security claim age and benefit type.
IRS proposes new required minimum distribution (RMD) tables from tax-deferred accounts
Required minimum distributions (RMDs) are the minimum amounts that the IRS requires to be withdrawn from specific retirement accounts annually. The IRS currently requires that withdrawals be made from your tax-deferred individual accounts (IRAs, Simple IRA, etc.) when you reach age 70.5 while allowing for exceptions for employer-sponsored accounts (401(k), 403(b) etc.) to start distributions post-retirement. In general, RMDs are calculated using life expectancy tables derived from census data, and while people have been living longer lives, it has been almost two decades since the last update to the IRS life expectancy tables in 2002, forcing retirees to deplete their accounts at a pace faster than the average population longevity.
Following up on an executive order late last year, the IRS has submitted proposals for new RMD tables to keep up with longer life expectancies. The proposal is in review and should take effect on January 1, 2021. We ran an analysis to see how the changes proposed affect the duration of a $1,000,000 IRA earning a 5% investment return annually. As you can see in the figure below, the new table proposed by the IRS would allow the account to have an additional $54,000 in tax-deferred dollars by age 100 versus the current RMD rules. In addition, the SECURE Act, which postpones all RMDs to start at age 72, adds an additional $32,000 to those tax-deferred dollars. The passage of the SECURE Act will likely prompt another change to the IRS tables.
Another powerful feature is that the United Income software can automatically optimize your withdrawals for expenses in a manner that is designed to minimize your taxes, which includes estimates of every RMD you will be subjected to for the duration of your financial plan.
If you are interested in learning more, please ask your wealth manager, who can connect you with one of our retirement policy experts on the United Income team.
Taxes and Contributions for 2020
Individual Retirement Accounts (IRAs)
An IRA is a tax-advantaged investment account that allows you to save for retirement. There are several types of IRAs designed either for personal savings (Traditional and Roth IRAs) or for self-employed individuals and small businesses (SEP and SIMPLE IRAs). Contributions to these accounts are generally capped with inflation adjustments made on a regular basis. Note that there is a combined contribution limit for Traditional and Roth IRAs.
Contributions to a Roth IRA are made after-tax, however the investments grow tax-free and your withdrawals in retirement can also be tax-free. On the other hand, contributions to a Traditional IRA can be tax-deductible and withdrawals are taxable in retirement. Depending on your financial plan, you could be better saving in one or the other or both, so be sure to reach out to your wealth manager if you have any questions on which strategy may be best for you.
As a reminder, the United Income software automatically provides a projection of the future value of every IRA account that you have under management with us. You can see these estimates by logging into your account – or by asking your wealth manager.
There are no changes to IRA contribution limits in 2020. As a reminder, 2019 IRA contributions can be made until April 15, 2020.
Tax-Deductible Contributions to Traditional IRA & Phaseout Limits
By way of background, contributions to a Traditional IRA are generally tax-deductible if your modified adjusted gross income (MAGI) is below certain phaseout limits and depending on your participation in an employer plan. If your income is above those limits, you can still benefit from tax-deferred growth in the value of the account. In addition, the portion of your withdrawals in retirement equivalent to your nondeductible contributions will be tax free.
The 2020 MAGI phaseout limits are as follows:
If you have any questions on what these income brackets would mean for you, please reach out to your wealth manager. Also note, that the United Income software takes these brackets into account in your financial plan and will cap your forecasted contributions accordingly.
Roth IRA contributions and Phaseout Limits
Your eligibility to contribute to your Roth IRA depends on your income: for instance, the higher your income, the less you can contribute to your Roth IRA account.
For 2020, the IRS has adjusted the income brackets that would restrict your contributions to a Roth IRA, which is included in the table below. As a reminder, the United Income software takes these brackets into account in your financial plan and will cap your forecasted savings in your Roth IRA accounts accordingly.
If you don’t have Traditional IRA funds and are above the income limits for the Roth IRA, you can contribute to a Non-deductible IRA and do a Roth Conversion – reach out to your wealth manager to learn more.
Workplace Plans Limits & Benefits
By way of background, the federal government provides tax incentives for a number of employer-sponsored retirement plans, such as 401(k)s, 403(b)s and other tax-advantaged accounts shown below.
In 2020, there will be an increase in the contribution limits allowed within these accounts, which is outlined in the table below. We also highlighted the 2019 contribution limits in case you need to do some end of year planning to increase or decrease your contributions to be within the allowed limits.
As a reminder, your United Income wealth manager can help you determine how best to manage investments in these accounts. In addition, the United Income software can automatically adjust your portfolio based on your investments in these types of employer-sponsored retirement accounts.
Employee Benefits Limits & QLAC
The federal government also enforces limits on other workplace benefits that an employer can provide such as matching contributions to tax-advantaged accounts, in addition to limits on qualified longevity annuities (QLACs). Below are the 2020 limits.
As a reminder, your United Income wealth manager can help you plan around these limits to determine the best vehicles for your savings while maximizing around your employer provided benefits.
Healthcare Spending Accounts & Commuter Benefits
The federal government also allows employers to provide flexible spending accounts which allow for tax-exempt contributions to cover health and transportation costs for employees. If your employer provides an option to select a high-deductible health plan (HDHP) you may be eligible to contribute to an HSA (health-savings account) which can have many advantages including being a tax-exempt vehicle to pay for medical expenses in addition to the ability to treat it similar to a Traditional IRA in retirement.
In 2020, there will be a slight increase to the contribution limits allowed in these accounts, which is outlined in the table below.
As a reminder, your United Income wealth manager can help you in selecting which benefits are right for you and your family and assist you in planning your contributions for the year. To learn more about these plans and if they are right for you, please reach out to your wealth manager.
Federal Tax Brackets
Planning for your future taxes is essential for the success of your financial plan, which is why the United Income software can estimate your forecasted tax burden for the rest of your life to help maximize the chance that your financial plan will succeed. We also optimize your recommended drawdown strategy to minimize your lifetime tax burden - log in to your financial plan to view how we recommend to drawdown your savings in retirement.
In 2020 the standard deductions as well as the income tax brackets have been adjusted for inflation. Below are the main changes to keep in mind while planning for next year. Remember that you can always reach out to your wealth manager to learn how these changes will affect you.
Federal Tax Standard Deductions
Income Tax Brackets
Capital Gains Brackets
Capital gains are taxed differently than ordinary income, usually at a lower tax rate. In 2020, there will be changes to the capital gains tax brackets due to inflation.
AMT Tax Brackets
Under current tax laws, certain taxpayers (usually high income earners) can wind up paying little to no tax. As a result, the IRS enforces a different set of rules to ensure that a minimum tax is paid. The alternative minimum tax (AMT) is a separate tax calculation made according to the rates below. For taxpayers, this means that if your calculated AMT taxes due is larger than your regular tax liability, calculated using the regular federal income tax brackets, you must pay the AMT tax to meet your minimum tax liability.
In 2020, there will be an increase in the brackets of the AMT tax due to inflation.
Gift & Estate Taxes
Under the current tax laws, certain gifts, such as property or cash, may be subject to a gift tax of up to 40%. It is the giver of the gift that is subject to these gift taxes. Most people may never have to pay this gift tax due to the annual gift exclusion and the lifetime exemption rules.
For 2020, the unified gift and estate tax exemption and Generation skipping tax exemption is $11.58 million -- up from $11.4 million. The annual gift tax exclusion remains at $15,000.
As a reminder, your United Income wealth manager can help you with plans designed to minimize gift and estate taxes, and has access to senior tax experts. Please let them know if you have any interest in exploring this expertise. In addition, make sure to include any charitable giving or bequests to your financial plan, so the United Income software can help you plan accordingly.
Estate and Trusts Income Tax Rates
In general, income that is generated by Trusts and Estates are taxed at a different, less favorable tax rate than regular income.
In 2020, there will be an inflation adjustment to those tax brackets as shown below.
As a reminder, your United Income wealth manager can help you manage how these tax rates apply to your personal situation.
Regulatory Changes on the Horizon
The SEC passed “Regulation Best Interest” in June 2019, which changes the duty of broker-dealers from ensuring that investments are “suitable” for clients to a duty to “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer.”
The regulation won’t be fully phased in until June 30, 2020.
Critics charge that this is a watered-down, toothless version of the fiduciary standard that Registered Investment Advisors are held to, saying that it is more likely to confuse consumers than change the behavior of brokers.