Congress enacted a $1.4 trillion spending package on December 20, 2019. The package includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act overwhelmingly passed the House of Representatives in the spring of 2019 but stalled in the Senate. The SECURE Act is the most sweeping set of changes to retirement legislation in more than a decade.
Many of the provisions offer enhanced opportunities for individuals and small business owners. But there is one big drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will want to revisit their estate plans to prevent their heirs from potentially facing high tax bills.
All provisions take effect on or after January 1, 2020, unless otherwise noted.
One change requiring urgent attention is the elimination of the “Stretch IRA.” Suppose a non-spouse beneficiary inherited traditional IRA or retirement plan assets. The “Stretch IRA” let him or her spread required distributions and their taxes over their lifetimes.
The new law now requires the beneficiary to liquidate the inherited account within ten years of the account owner’s death. The beneficiary must be 10 years younger than the account owner for this rule to apply. Exceptions apply if the beneficiary is a spouse, disabled or chronically ill, or a minor child. This shorter distribution period could result in unanticipated tax bills for beneficiaries. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
Traditional IRA owners may want to also revisit how IRA dollars fit into their estate planning strategy. For example, it may make sense to consider the implications of converting traditional IRA funds to Roth IRAs. Beneficiaries inherit Roth IRAs tax free. Roth IRA conversions are taxable events. But investors who spread out a series of conversions over several years may enjoy the lower income tax rates expiring in 2026.
On the plus side, the SECURE Act includes several provisions designed to help American workers and retirees.
The SECURE Act also helps employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
By one estimate, a 65-year-old couple who retire in 2019 may need about $300,000 in savings to pay their health-care expenses in retirement. This includes premiums for Medicare Parts B and D, supplemental (Medigap) insurance, and median out-of-pocket prescription drug expenses, but not other health expenses such as long-term care, dental care, and eye care.1
Health expenses are rising faster than inflation, and even insured workers are finding it harder to pay their portion from year to year (premiums, copays, coinsurance, and deductibles), much less plan for the future. The stakes are even higher for early retirees (younger than 65) and self-employed individuals who must purchase their own health insurance and bear the entire cost themselves.
A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs.
HSAs offer several tax benefits to help encourage diligent saving.
Depending on your state, HSA contributions and earnings may or may not be subject to state taxes.
The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA.
Funds roll over from year to year and are portable, which means they are yours to keep. When HSA balances reach a certain threshold, you can steer the funds into a paired account with investment options similar to those offered in a 401(k). You can make 2019 contributions up to April 15, 2020.
HDHPs are designed to help control health costs. HSA owners are forced to pay attention to prices, so they may select lower-cost providers and be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it, because they don’t want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn’t been much time to build up an HSA balance.
To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan — an HDHP with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Workers who are offered HDHPs (as a choice or their only option) or purchase their own insurance often face much higher deductibles. In 2019, the average deductible for employer-provided HDHPs was $2,486 for individual coverage and $4,779 for family coverage.2
Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario.
Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer’s negotiated discounts.
Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly.
Another HSA benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life.
If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time.
Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an HDHP, make sure to contribute the premium dollars you are saving to your HSA, and more if you can.
Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network.
In a recent study conducted by the ‘National Retail Federation and Prosper Insights and Analytics’, it was found that the average American family will spend just south of $700 for back-to-school costs in 2019. Is your child soon to be a college student? The same survey reported you should be ready to spend a little less than $1,000 alone for start-up school supplies. While this cost seems large, it’s just a part of your financial portfolio. Back-to-school time is not only a great time to plan a scholastic budget, but also reviewing and reassessing your financial plan. Below is your Official 2019 Back-To-School Financial Guide to make sure your student, and your financial goals, stay on track:
How has your year progressed in terms of finances? Have you met or succeeded in your goals? Developing a spreadsheet and comparing where you were at the beginning of the year to where you are now can help you asses how aligned you are with your financial goals. Building this report toward the latter of the year will also give you time to adjust your plan (if needed), throughout the remainder of 2019.
Life happens, which is why insurance was invented. Whether you want to provide for your family in case of an emergency or someone forgets to turn off the stove…again; insurance of all sorts can help cushion the blows to your wallet and financial well-being. However, just as life is always changing, so too are your insurance needs and costs. Once a year, you should reevaluate your insurance needs and coverage for any change. While you may not be able to change health insurance in the middle of the year, items like car and home can be changed with a little research and not much effort.
Regardless if you are married, single, with or without dependents, it is crucial to create and maintain a workable budget. Life changes on a regular basis and your budget must coincide with your current income, needs wants, and goals. Back-to-school time is an ideal time to revisit your budget. It’s a relatively slow time on the tail end of summer travels and on the steps leading up to the holiday season. Budgets should be regularly checked throughout the year and especially after any life changes like marriage, death, education, etc.
Now is the best time to make sure you are receiving the most tax breaks you can on income for 2019. Items like 401(k), charitable contributions, and retirement contributions are all fantastic ways to reduce your tax liability. Consider boosting certain contributions to reduce what you’ll pay in taxes. While ‘tax season’ is still months away, it’s important to start looking at your 2019 year from a financial perspective and start looking out other ways to save on taxes before years end.
Back-to-school season signifies the approach of cooler weather, the quick onset of school costs, and the ultimate approach of years end. Make sure you have a great start to 2020 and finish off 2019 by utilizing this guide when looking at the remainder of your financial year. Although these are good recommendations to start with, you should connect with a financial professional to see where you are on your financial journey and how these tips could benefit you.
For those who are looking for financial advice, we realize the available options are many and deciding who to work with is a challenging problem. At SeaCure Advisors, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!
Disclosure: This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives.
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