Congress recently passed the Setting Every Community Up for Retirement Enhancement, or SECURE Act. The bill marks some of the most significant changes to retirement policy in more than a decade. The bill first made headlines back in the spring when it received bipartisan support in the House of Representatives. Then it stalled in the Senate due to a handful of provisions but remained a priority throughout the rest of the year. The SECURE Act was attached to the year-end Congressional appropriations bill that kept the government funded through the end of 2019.
Lawmakers have remained focused on the need to help improve retirement savings for American workers. The bill makes several significant changes to the current retirement landscape, including:
- Reduces the restrictions for multiple employer plans, or “MEPS,” where small businesses can band together to offer retirement plans, such as 401ks, to their employees and share costs.
- Removes the age cap for Individual Retirement Account (IRA) contributions for workers over the age of 70 ½.
- Non-spouse beneficiaries of tax-deferred retirement plans, like 401ks and IRAs, must distribute all plan assets within a ten-year period and pay all corresponding taxes (eliminates the “stretch” IRA opportunity). The rule also applies to Roth IRAs but those distributions are typically non-taxable.
- Increases the availability of annuity options within retirement plans.
- Increases the Required Minimum Distribution (RMD) age from 70 ½ to 72 (applies to those who turn 70 ½ after December 31, 2019).
- Allows certain long-term part time workers access to company retirement plans.
- Up to $10,000 of 529 account assets can be used for student loan repayments.
- Parents may take up to a $5,000 penalty-free distribution from their retirement plan for the birth or adoption of a child (the distribution is still taxable).
Early feedback from the passing of the SECURE Act appears to be mixed. It’s hard to argue against giving more workers the opportunity to save in retirement plans. It’s no big secret that many Americans are facing a shortfall when it comes to their retirement savings. Many small businesses do not offer retirement plans so hopefully these new provisions will help improve that.
Current retirees who have not yet reached the age for mandatory distributions, or RMDs, now have an extra year and a half to allow their assets to grow tax-deferred. The elimination of the stretch IRA for non-spouse beneficiaries may require retirees to reconsider their estate plans. It will likely prompt an increase in Roth conversions for those with large tax-deferred assets.
Roth conversions allow an individual to transfer pre-tax dollars to a Roth IRA and pay the tax on the corresponding amount. The funds then grow tax-free for the remainder of the account owner’s lifetime. Under the new rules, non-spouse beneficiaries of Roth IRAs are now required to distribute those assets over a 10-year period, but those distributions are tax-free. Thus, it has become an effective wealth transfer tactic and its popularity will likely increase in the future.
Like any legislation, it will take time before the potential benefits are realized. For those who are still working, it provides an opportunity to review your current retirement savings strategy to make sure you’re maximizing all available benefits. For retirees, it makes sense to review whether Roth conversions make sense and how the change to the RMD age may impact your wealth distribution strategy. Regardless of whether you’re working or retired, changes like these highlight how financial planning is an ongoing process and it’s important to consistently review your plan to make sure you’re still on track.
If you have any questions about these changes and how they may impact your financial situation, please feel free to contact us. We are ready to help address any questions or concerns you may have.
SECURE Act – House Committee on Ways & Means
Congress Passes Sweeping Overhaul of Retirement System
Advisers weigh in on SECURE Act, approved by House and on way to Senate and the White House
SECURE Act Provisions Folded Into Congressional Spending Bill Passed By House