“Regulation needs to catch up with innovation.”
                                                -Henry Paulson

2020 is shaping up to be a big year in regulatory changes in the financial industry. Some of these changes will affect you directly, some probably won’t matter to us at all, and for others it’s too early to tell. So, let’s start off the new year first with the changes that you really need to be made aware of, and then we can talk a little about some proposed regulations and what they may mean.


The Setting Every Community Up for Retirement Enhancement (SECURE) Act was surprisingly signed into law on December 20. I say surprising because while it was passed by both houses of Congress earlier in the year, it seemed to be languishing on the President’s Desk and most industry insiders assumed it would get tabled into at least 2020 given all the other things going on in Washington. However, it was at the last minute attached to the spending bill that prevented an early year government shut-down and is now the law of the land. What does this mean for you? There are many provisions that apply to 401(k) plans and while many of you are still contributing to your employer plans, those changes are mostly technical and don’t apply to what we at Keeling Financial do for our clients, so we’ll leave it to your plan custodians to fill you in on anything in that realm. The changes to 529 plans and most notably IRA accounts is what we really need to inform you about.

Contributions over age 70

You can now make contributions to IRA’s or Roth IRA’s if you are over the age of 70. You still need to have earned income from some kind of employment, but until now those who worked at a job with a 401(k) or other “retirement plan” could still make contributions regardless of age, but those who didn’t have access to that type of account and were still working could not take advantage of IRA contributions. The playing field on this has now been made level, so if you are over age 70 and still have earned income that you want to defer into a retirement plan, give us a call.

Push Back on RMD Age

The RMD or Required Minimum Distribution is an amount you are mandated by law to take from your IRA or other tax-deferred retirement account once you reach a certain age. You then, of course, have to pay taxes on that distribution whether you need the money to fund your lifestyle or not. The age of RMD was 70½ - but now under the SECURE Act it has been pushed back to age 72; But there is a catch. If you were already 70½ or older in 2019, meaning if you already had to take a distribution, then you must continue distributions as if the law had not changed. Most people who are already taking distributions will be age 72 or older in 2020 anyway, so this muddled area really only applies to those born between January 1 and June 30, 1949. If you were born during that time frame, congratulations - you got hosed. The IRS is also going to be reworking the life expectancy tables that haven’t been changed since 1997 – that change isn’t scheduled to go into effect until 2021 but once it does it means you will be required to take less out of your IRA’s and begin those distributions at an older age – which means lower taxes for those who don’t need more than their RMD amounts to live on. Lower taxes also mean less Government revenue and this bill was supposed to be revenue neutral; that leads us to the next major change.

The Stretch IRA is Dead

This only applies to IRA’s inherited from those who pass away in 2020 or after. Everyone out there with a beneficiary IRA that they already inherited, or are in the process of inheriting from someone who died in 2019 or before – nothing for you is changing. Going forward, however, one of the best tax avoidance strategies ever devised will no longer be available. Under the old rules, if you inherited an IRA from a non-spouse (the spouse to spouse rules did not change) you had to take RMDs based on your life expectancy. Let’s say for example you had $500,000 in your IRA and left it to your grandchild who was 15 years old when you passed away. Under the old rules they would be required to take distributions from that inherited IRA, but based on their life expectancy, about 65 years. In this example they would have to take 1/65 th of the account balance out in year one – or about $7,600 – and pay taxes. Then in year two they would have to take out 1/64 th, then 1/63 rd etc. Since the percentage of those withdrawals is about 1.5% of the account balance and grows very slowly for the next 40 -50 years it would be pretty easy to earn on average more than that required distribution amount – keeping that account growing for an additional half a century tax deferred (or tax free for a Roth.) Even at a very modest 5% growth after the distribution, that would turn a $500K account into a $6 Million account. But that option is now gone.

Going forward if you inherit an IRA from someone other than a spouse you will have to take out the whole distribution within 10 years with some exceptions. There is no year by year requirement, so you could take the whole thing out in year one, or wait and take it all out in year ten – so there is certainly a planning element here to make sure you take the distribution out at the most tax opportune time. If you are 59 and plan to retire at age 63 it may make sense to wait until retirement for example. But lots of things, your tax bracket your Social Security income, the size of the inherited IRA – all need to be taken into account. This is an even worse change for those who will inherit a Roth IRA, Roth’s have also always required distributions from those that inherit them – but as you can see in the scenario above, the fact that Roth’s grow tax-free makes the stretch even that much more valuable. I know there are those who converted their Traditional IRA’s to Roth IRA’s just to create this tax-free lifetime income for their children or grandchildren that now will not be able to do so. If this is you – give us a call we have some ideas.

Now for the exemptions. As mentioned, spousal rules don’t change. If you inherit an IRA from somebody less than ten years older than you the rules also don’t change – this is designed for say a 70-year old sister that inherits her 78-year old brother’s IRA, but could also apply in unfortunate situations where someone passes away young. If the inheritor has a permanent disability, they also can continue to use the old rules. For minor children the rules are slightly different as well, and in some ways better. An IRA inherited by a minor child requires no distributions until that child reaches the age of 18, and then the ten-year window starts. While they can’t keep growing the account over their whole lives – the reality is they rarely do that anyway. Most beneficiaries use the money within a fairly short period of time, so this provision for minors at least helps their parents or guardians who often have to pay their child's taxes avoid that burden.

529 Plans

These changes are also minor, but might be important to you. The balances of 529 plans can be used to pay expenses incurred during a qualified internship – typically the kind of internship that is arranged by and given credit through a college or university. And up to $10,000 a year can come out of a 529 plan to pay student loans. If you had a balance in a 529 plan why would you ever take out loans in the first place? I can think of a few scenarios, but the one I’ve seen happen the most often is parents and grandparents not communicating effectively. There have been many times were a grandparent has set up a 529 plan and the parents are unaware, so the parent may take out a loan during the financial aid process before the grandparents can take distributions from the 529 plan to fund tuition payments. 

Other Regulations

The SEC has come out with Regulation BI (best interest) which increases the disclosure requirements for those regulated by the SEC to their clients. This new regulation hasn’t been fully implemented yet, but is also expected to be duplicated by the modified Department of Labor regulation that was vacated by a court case a few years ago. Many individual states, Massachusetts chief among them, do not think the Regulation BI goes far enough and has proposed their own fiduciary rule that requires all financial advisers of all types to act only in the best interest of the client. I have no problem with the wording or the spirit of the Massachusetts regulation. My problem is in the implementation of the rule – how do I prove for every meeting, with every client that I am complying with that new regulation? Is there new paperwork involved, can I write my notes the way I always have or are there pre-set templates I have to employ? I’m not afraid of the liability of the regulations, I’m worried about the cost of implementation. Up to this point I have never put a hard account minimum on our business. I’m not going to open a $5,000 account from a total stranger, but I was always happy to open a small Roth IRA for your grandson, or the $15,000 401(k) rollover for your daughter. Depending on how this new Massachusetts law manifests itself we may have to rethink being able to offer those services, that have always been best done as a one-time commission-based transaction. We will have to wait and see. 

That’s probably enough for now. I hope everyone had a wonderful Holiday. 2019 was a great year in the markets so what can be gleaned by that for 2020 – absolutely nothing. Following 20 + up years in the stock markets the following years were as likely to be up or down as any other year. To paraphrase mid-century British Prime Minister Harold McMillian (no relation to Brad in the video below - as far as I know,) what will determine the markets in 2020; “Events, dear boy, events.” And thus, it was ever so.