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May 28, 2019

Legislative Changes to Retirement Plans That May Affect You

Legislative Changes to Retirement Plans May Affect You

Last Thursday, the House of Representatives overwhelming passed the Setting Every Community Up for Retirement Enhancement, or SECURE, Act. This is the first step in creating a new law to try to address the retirement savings crisis highlighted by “The Report on the Economic Well-Being of U.S. Households in 2018” published this month by the Board of Governors of the Federal Reserve System.  The report states that 26% of non-retirees have no retirement savings whatsoever.  The Senate is also trying to address the crisis with a similar bill called the Retirement Enhancement and Savings Act of 2019, or RESA 2019.  There is strong bipartisan support so we believe that some version of these bills will be made into law this year.  We don’t know what the final version will include, but we want you to be aware of some of the features of the SECURE Act:

  • For small business owners, the bill creates incentives to help you establish a retirement plan for your employees.  You may be able to pool together with other small businesses to offer a 401(k)-type savings plan.  Ideally this would give you access to lower cost plans with a greater number of investment options.  Also, the SECURE Act introduces a tax credit of up to $500 to encourage auto-enrollment of employees.

 

  • There’s good news for new parents.  The bill allows up to $5,000 to be taken from IRAs or 401(k)s penalty free within a year of the birth or finalization of adoption of a child to help cover related expenses.

 

  • Part-time employees get a benefit under the bill, too.  Generally, under current law, employers can exclude any employee who works less than 1,000 hours per year from participating in the retirement plan.  The SECURE Act has a provision that employers must have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) OR three consecutive years of service where the employee completes at least 500 hours of service.

 

  • Are you close to 70 years old?  Currently, once you turn 70 ½, you must start taking required minimum distributions (RMDs) from your retirement accounts.  These distributions are taxed as ordinary income to you.  Under the SECURE Act, the age to start taking the RMDs would be raised to 72.  The RESA 2019 has a provision to raise the age to 75.   Either change will help keep taxes lower for those who do not need to take money from their retirement accounts. 

 

  • Another benefit for those who are 70 ½ is that the SECURE Act repeals the age cap for contributing to a traditional IRA.  Many people choose to work past age 70 and, if this becomes law, they will be able to continue saving into retirement accounts.

 

  • Have you ever wondered how much you need to save into your retirement account to live comfortably in retirement?  Under the SECURE Act, defined contribution plans would be required to report how much income could be provided by the balance in the account.  The details as to how exactly that would be calculated aren’t available yet; it will be important to understand the underlying assumptions.  Of course, that may not reflect your entire retirement planning picture, but it will be helpful.

 

  • The bill allows you to invest in annuities within your defined contribution (e.g., 401K, 403b) plan account.  Employers would be able to choose whether to offer an annuity option that could convert your retirement savings into a steady lifetime income stream.

 

  • There are changes to the time frame in which inherited IRAs would have to be paid to the beneficiaries. Generally, under current law, distributions from an inherited IRA can be “stretched out” over the life expectancy of the beneficiary.  As part of the revenue generating provision of the bill, more beneficiaries would have to distribute an IRA inherited after December 31, 2019 within a 10-year period.  The RESA 2019 has a different provision but would eliminate the so called “stretch IRA” for IRAs over $450,000.  Either change will deepen the need for estate and tax planning for beneficiaries of IRAs.

 

  • Do you have a student loan?  Under the SECURE Act you would be allowed to withdraw up to $10,000 from a 529 education savings plan for repayment of some student loans.  One version of the bill had a provision to be able to use 529 monies for home schooling but that did not make into the final version of the SECURE Act.  We’ll have to see if it reappears in RESA 2019.

There are many other provisions in the Act including special rules dealing with taxpayers who are judges, first responders, and church-controlled organizations.  We will keep monitoring the situation to see how this impacts our planning strategy for our clients.  The good news is that Congress has recognized a looming problem and is taking steps to provide incentives for businesses and individuals to improve chances for a successful retirement.

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