RETIREMENT ACCOUNT CHANGES
Recent legislation is designed to make it easier for people to save more for retirement
Kendall W. King is CEO of Castleview Wealth Advisors.
What is the SECURE Act? The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, is written to make
it easier for people to save more for retirement by expanding savings options and extending the age requirement for taking withdrawals and making contributions. The House of Representatives passed this bill in late May, and if passed by the Senate and signed into law, it would have significant effects on options in 401(k), IRA, and 529 plans. Most of the effects of the bill would be beneficial to retirees in that they would have more choices about how they save for retirement.
What are the key provisions of the act?
The SECURE Act would allow traditional IRA contributions to be made past the current age limit of 70½. This change would allow older workers to save more of their earned income in a traditional IRA, just as they now do in a Roth IRA. An older worker who has enough income to cover the total IRA contributions also could contribute to a spousal IRA for a retired spouse. The act would increase the starting age for required minimum distributions (RMDs) from retirement accounts to 72, from 70½ currently.
One of the more important provisions in the bill is a new benefit for part-time workers. At present, companies can exclude people who work less than 1,000 hours per year from participating in a 401(k) plan; however, under the SECURE Act any employee who has worked a minimum of 500 hours for at least three consecutive years would be eligible to join the company's 401(k) retirement plan.
Finally, the bill offers more options for parents, who would be able to withdraw up to $5,000 from 401(k) plans after the birth or adoption of a child. The bill would also allow withdrawals of $10,000 from 529 plans without penalty to repay student loans.
One unattractive feature of the SECURE Act is that it eliminates the stretch IRA, a valuable asset through which traditional IRA owners leave their retirement accounts to children, grandchildren, or other beneficiaries. Under current rules, stretch IRA recipients can parcel out the required minimum distributions from the accounts over the course of their actuarial lifetimes. Under the Secure Act, inherited IRAs will no longer be subject to annual required minimum distributions, and will instead give non-spouse beneficiaries 10 years to pull out all the money in an IRA.
Will the SECURE
Act become law?
The bill was approved in the House with a 417-3 vote and now goes to the Senate. Given the overwhelming bipartisan support in Congress and among other national leaders, it's likely to pass, although the timing is unclear. Most senators have spoken out in favor of the SECURE Act, suggesting its passage is likely. If and when this happens, the bill would head to President Trump. While Republican lawmakers are generally resistant to pass increased taxes on inheritors of wealth, given the broad majority by which the House bill passed, it seems likely that most of these provisions will eventually become law.
If the bill passes, how will it affect me?
The majority of the changes will be helpful for you if you plan to work into your 70s and later, since the bill gives you more options to save towards retirement goals. The major drawback of the bill is that it may complicate your estate planning if you hold IRA accounts, since it will require your heirs to consider some tax-planning strategies when receiving these assets. The loss of the stretch IRA could make Roth accounts more attractive to your planning, since beneficiaries can withdraw Roth money tax free. From a small business owner perspective, it will be less expensive to offer 401(k) plans and allow more employees the ability to save at work. Additionally, if you are a part-time worker, you will likely be able to contribute to a 401(k) plan, which is generally a great way to save for retirement.