Americans share at least one dilemma when it comes to retirement planning. From the worker to the employer to the policymaker, everyone is living longer. On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, receiving almost unanimous bipartisan support, offers the most significant shift to retirement plans and opportunities since the Pension Protection Act of 2006. In the bill, there are over 25 changes and provisions that expressly aim to encourage retirement savings among all workers. This bill addresses the apparent need for a worker’s wealth to run (and finish) the race with them. This document may face modification before being signed into law, but one thing is clear: change is coming. Below we have prepared a synopsis of the changes that present the most opportunity.
Pooled Employer Plans
Many businesses are without affiliation and are too small to offer a savings retirement plan on their own. The new bill will reduce fiduciary responsibility and lower the overall costs associated with providing 401(k) plans by expanding the option to run multi-employer plans through a plan administrator. Sec. 106 goes a step further to incentivize smaller businesses to offer a retirement savings plan. The Act introduces a $500 tax credit for automatic enrollment into their retirement plan.
Annuities
The SECURE Act eases the liability concern over offering annuities. Most businesses have shied away from annuity providers because of their inherent risk. Section 204 updates safe harbor provisions, thus opening the door for employees to take advantage of converting their 401(k) balances to a pension-like payout plan. Another provision of the bill will allow workers to transfer a defunct annuity contract to an IRA while maintaining contributions. The only criticism on this update is the broad guidelines surrounding annuity providers. Some fear that ambiguity will lead to insurance companies offering shoddy plans.
Required Minimum Distribution (RMD) Age
The current law requires that most individuals begin withdrawing a minimum distribution from their retirement savings at the age of 70.5. Six-months-past-70 has invited an unnecessary amount of confusion since its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the age requirement will be raised even higher to 75.
IRA Contributions
One of the most confounding retirement rules is the age limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals the age limitation for traditional IRA contributions.
Benefit to Parents
Section 113 removes the 10 percent penalty tax from qualified early retirement plan withdrawals. Parents will be able to take an aggregate amount of $5,000 within one year of the adoption or birth of a child, penalty free. Section 302 expands section 529 plans by allowing withdrawals of as much as $10,000 for repayments of some student loans.
Stretch Provisions
Currently, beneficiaries of inherited retirement plans like 401(k), traditional IRAs, and Roth IRAs can spread the distributions until their dying breath. The new revenue provisions (Section 401) changes the rules, requiring most beneficiaries to distribute the account over a 10-year period and pay any taxes due. The tax-generating change will accelerate the depletion of many inherited accounts but will not affect surviving spouses and minor children.
Disclosures
Another administrative improvement provided in the Act requires employers to provide a lifetime income disclosure once every 12 months. The disclosures are meant to show the amount of monthly payments the participant or beneficiary would receive based on the total accrued benefit.
Kiddie Tax
Under the current law, the unearned income of children would be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie tax” measures that were added by the 2017 Tax Act. The new provision states that unearned income of children would not be taxed at trust rates. Taxpayers can retroactively elect to not pay the taxes. The bill benefits many Americans, including families of deceased active-duty service members, survivors of first responders, children who receive certain tribal payments, and college students receiving scholarships.
Other changes proposed in bill include increased penalties for failures to file and the portability of lifetime income options. The SECURE Act is as likely to pass as it is to undergo slight modifications. We will keep an eye on the state of the bill and keep you abreast of its status. In the meantime, our professionals are standing by to answer your questions and address your concerns.