The SECURE Retirement Bill

The SECURE Act Would Usher in Several Positive Changes for the Retirement System While Increasing Taxes on Many Beneficiaries

The US House of Representatives recently passed the SECURE Act (Setting Every Community Up for Retirement Enhancement) which aims to make numerous changes to our nation’s retirement system.  With bipartisan support and spearheaded by the chairman of the House Ways and Means Committee, Rep. Richard Neal (D. Mass), the House voted 417-3 to pass the bill which has since moved to the Republican-controlled Senate for review.

The bill focuses on adding flexibility to many areas of the US retirement system.  Here are some of the main highlights of the proposed bill:

Increasing the Age to Start Required Minimum Distributions from Retirement Accounts

Current law states that IRA owners must begin to take mandatory minimum annual distributions from their IRAs and retirement accounts, such 401ks if retired, once they reach age 70.5.  The new bill would delay the start of these mandatory distributions to age 72.  The IRS collects income taxes on these required minimum distributions (RMDs) from IRA accounts and, if passed, the bill would help investors delay the tax burden for almost two years.  It would also give IRA owners a little more time to gradually convert traditional IRA assets to Roth IRA assets.  Roth IRAs are not subject to mandatory distributions because income taxes have already been paid on contributions.  The proposed legislation contains an effective date of December 31, 2019, so individuals currently receiving RMDs would not be impacted.

Removing the Maximum Age for Traditional IRA Contributions

The House bill eliminates the age restriction of 70.5 for making traditional IRA contributions.  According to the US Bureau of Labor Statistics, US workers age 65 and above are predicted to have the fastest labor force growth of any age group during the decade between 2014 and 2024.  Elimination of the age restriction will help American workers who continue to work into their seventies save for retirement.  Additionally, the new legislation will treat stipends and non-tuition fellowships paid to students as eligible income for IRA contributions.

Increased Access to 401ks for Part-time Workers

Today, employers are generally able to exclude part-time employees (typically those that work less than 1,000 hours per year) from a defined-contribution plan such as a 401k.  The House bill would allow plan access to workers with at least 500 hours of service per year over a period of three consecutive years.  Essentially, the new law will provide access for long-term part-time employees who would otherwise not be allowed to participate in a 401k plan.  This could be especially helpful for workers with reduced hours who are raising a family or assisting with elderly relatives.

Allows Small Businesses to Band Together to Set Up Retirement Plans

The new legislation would allow unrelated small businesses to band together to make it easier to establish retirement plans for employees.  These open “multiple employer plans” (MEPs) would aim to help reduce the burden of costs and administrative issues associated with retirement plans and provide more access to systematic savings for workers of small companies.  Companies would not need to be in similar industries or geographic areas to participate.

Addition of Annuities to 401k Plans

The SECURE Act would make it easier for employers to include annuities in 401k plans.  The legislation provides employers a safe harbor for selecting an insurer that would provide the annuity products to the plan.  This change offers participants a potential income option upon retirement which would be subject to the financial strength and claims-paying ability of the insurer.  On its face, adding an annuity income option for retirement plan participants can be an effective way to plan for future cash flow needs.  As with anything, participants will need to pay close attention to the fine print.

Defined contribution plan statements would need to disclose lifetime income estimates at least annually to participants.  These disclosures would allow participants to see what their account value would translate to if converted to a stream of monthly lifetime payments.  The legislation aims to help workers visualize the task of replacing the monthly paycheck from their employer during retirement.

Penalty-free 401k distributions for Adoption and Costs Related to Birth

There would be some relief for families paying for adoption costs and expenses related to the birth of a child.  Plan participants would be allowed to withdraw up to $5,000 penalty-free within one year of adoption or birthdate.

Expansion of 529 Plans

The SECURE Act would also expand the use of section 529 savings plans to pay for costs associated with apprenticeships and up to $10,000 of qualified student loan repayments.  The bill initially had a provision to also cover the costs associated with homeschooling which was ultimately pulled before being sent to the Senate.  It remains to be seen if this will be added back to any final legislation.

Changes to the Distribution Rules for Inherited IRAs

One of the primary revenue generators in the SECURE Act is from changes in the treatment of mandatory minimum distributions for inherited IRAs.  Under current law, a non-spouse beneficiary of an IRA or retirement account must take annual required minimum distributions (RMDs) from the inherited IRA over the course of the beneficiary’s life expectancy.  For someone who inherits an IRA in their thirties or forties we’re looking at distributions that could be stretched over several decades.  This is where the so-called “Stretch IRA” comes from; non-spouse beneficiaries, typically children of the deceased retirement account owner, could stretch mandatory distributions over extended periods of time.  This strategy would allow the IRA to continue to enjoy compound annual growth while making minimum taxable distributions.  The House bill would change all that.  Specifically, non-spouse beneficiaries would be required to empty the inherited IRA within ten years of the date of death of the original account owner.  A change like this would accelerate the tax revenues owed to the government and increase the tax burden on beneficiaries.  Spouses would not be subject to this provision.

The rules regarding trust beneficiaries of IRAs would also be significantly changed under the SECURE Act.  IRA account owners with trusts listed as beneficiaries should be aware of these provisions once the bill is finalized.

It should be noted that with all proposed legislation, changes are typically made several times until the bill is officially signed into law.  In fact, the Senate has their own proposed version of a retirement system overhaul called the Retirement Enhancement and Savings Act (RESA) that would also require non-spouse beneficiaries to fully distribute the value of inherited IRAs but would seek to exempt those accounts with values less than $450,000.  The RESA language would also look to delay the starting age for RMDs from 70.5 to 75.

We continue to monitor the progress of the SECURE Act as it makes its way through the Senate.  Most reports indicate that the bill has broad bipartisan support and is expected to be passed into law albeit with modifications.

As always please consult with your wealth advisor regarding any questions you may have on how the SECURE Act could impact your personal situation.