Are you frustrated with the current environment regarding retirement accounts? While some individuals do not have access to certain types of accounts, others are frustrated with the current rules around contributions and distributions. Relief may soon be on the way via a significant piece of retirement legislation aiming to make sweeping changes.
The Political Environment
To help tackle issues like these, the U.S. House of Representatives recently passed a bipartisan bill called the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) that aims to make some big changes to retirement plans.
It was passed in the House on May 23, 2019 by an overwhelming 417-3 vote. Now it’s on the way to the Senate. This act is primarily designed to encourage retirement savings and promote long-term financial stability. The bill is very detailed and covers a multitude of things, but I’ll highlight some of the more common changes - ones that just might affect you.
You may have heard about a similar Senate-sponsored act, the Retirement Enhancement and Savings Act (RESA). The Senate could simply pass the SECURE Act, or they could pass RESA and then have the two bills reconciled in a joint committee. At this time, we don’t know the ultimate outcome, but it is becoming increasingly likely that the Senate will make some changes to the SECURE Act before it becomes law. Since the SECURE Act has officially passed through the House, we’ll focus on its details.
Impact on Contributions and Distributions
Here’s the way it works now. With traditional IRAs, 401(k)s, and other defined contribution plans, you are prohibited from contributing additional money once you reach the age of 70 ½. In addition, these accounts are subject to required minimum distributions (RMD’s). So, when you reach age 70 ½, you’re required to take a minimum distribution or face a penalty.
The changes in the SECURE Act are influenced by Americans generally living and working longer. This is the way these proposed changes look now. If you are age 70 ½ or older with earned income you can continue to place money in these kinds of accounts. And you won’t need to take a RMD until age 72. (Note there is currently no RMD requirement for Roth IRAs and this would be unchanged in the new act.)
Changes to Inherited Retirement Accounts
The SECURE Act also makes changes to Inherited IRAs and inherited defined contribution plans.
Currently, a non-spouse beneficiary of an Inherited IRA has three options for withdrawing funds: “Life Expectancy Rule”, which requires the beneficiary to distribute an amount each year based on his or her own life expectancy; “Five-Year Rule”, which requires the beneficiary to distribute the account over a five-year period; and “Lump Sum Distribution” in which the beneficiary takes the entire distribution at one time.
Significant Change: The SECURE Act would require a non-spouse beneficiary to withdraw the money within ten years of the original owner’s death, regardless of the beneficiary’s age. While it is simpler, this provision may potentially reduce tax and investment advantages.
The SECURE Act also has provisions giving people easier access to 401(k)s; the ability to save more in their 401(k)s; and transparency regarding how much income their retirement savings is expected to provide them. Changes in the bill would:
- Require employers to offer defined contribution plans (except in the case of collectively bargained plans) to part-time workers who completed at least 500 hours of service each year for three consecutive years.
- Make it easier for small businesses to join together to offer “open” multiple-employer plans (MEPs) to their employees, which makes it more affordable for the companies to offer retirement plans by spreading out the cost.
- Increase the maximum employer 401(k) contribution amount from 10 percent to 15 percent.
- Allow annuities to be offered in 401(k) plans.
- Require plan sponsors to disclose annually an estimate of income that would be generated by the current balance in their 401(k) accounts.
And there’s more…
Beyond the above-mentioned changes, the SECURE Act also increases the flexibility for individuals to access their accounts for other reasons, including:
- Allowing parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption of a child for qualified expenses.
- 529 plans are also addressed in the SECURE Act and one of the provisions would allow parents to withdraw up to $10,000 from 529 plans to repay student loan debt.
Based on overwhelming bipartisanship support, most politicians are optimistic that this bill, or one very similar to it, will be finalized before the end of 2019 and implemented in 2020. Although we don’t yet know what the final version will include, it’s good to have a head’s up so you can speak with your financial and/or tax advisor and prepare for anticipated changes.