Back in May, the House overwhelmingly passed a bill that would bring sweeping changes to the retirement savings landscape. However, the Setting Every Community Up for Retirement (SECURE) Act stalled in the Senate and appeared unlikely to pass in 2019. That is until this week, when the SECURE Act made it in to the government spending bill, almost ensuring passage before year-end.
What is in the SECURE Act, and how will it affect your retirement plan? Let’s take a look at a few key provisions pertaining to individuals.
The Good
Increase the age for Required Minimum Distributions to 72 – Under the current law, retirement savers must begin required minimum distributions (RMDs) from their IRAs and 401(k) plans in the year they reach age 70 1/2. This was always a confusing start date, allowing those with birthdays in the second half of the year to wait an extra year. The new age gives savers an extra year and a half to delay withdrawals and the income tax associated with them.
Removes the Restriction of IRA Contributions After Age 70 1/2 – Workers over age 70 1/2 are not allowed to make IRA contributions today. This age limit did not apply to other retirement savings plans such as 401(k)s. As more Americans are working longer, this change makes a lot of sense.
Penalty Free IRA Withdrawals of $10,000 for Birth or Adoption of Child – Most withdrawals from IRAs prior to age 59 1/2 incur a 10% penalty in addition to tax owed. The new law allows for penalty free withdrawals of $10,000 in the year of a birth or adoption. While it may not be the best policy to encourage new parents to use their retirement funds for this purpose, it provides relief during a very expensive time of life.
529 Plan Distributions for Student Loan Payments – One of the drawbacks of 529 plans is the limitation on qualified expenses. Qualified expenses include only tuition, fees, books, and supplies equipment at an eligible college or university. The SECURE Act includes a provision that allows a lifetime maximum withdrawal of $10,000 to pay student loans. Unlike Senator Rand Paul’s recent proposal to allow 401(k) withdrawals to pay student loans, this is more closely aligned with the intent of 529 plans.
The Bad
Elimination of Stretch IRA Strategy – Non-spouse beneficiaries of IRA accounts have been allowed to stretch withdrawals from these accounts over their lifetime, a strategy that defers tax owed on withdrawals for decades. The SECURE Act eliminates this option for most beneficiaries and instead requires them to withdraw all funds within 10 years of inheritance. Exceptions are made for beneficiaries who are disabled, chronically ill, or are minor children. Ten years is still a long time, but this change warrants a review of your estate plan and beneficiary designations.
Annuities in Retirement Plans – Much of the language in the SECURE Act applies to employer-sponsored retirement plans. The life insurance industry lobby is one of the main backers of the bill, which removes a fiduciary obligation for retirement plan sponsors who choose to allow annuity options in their plans. In theory, retirement plan participants would benefit from having the option to purchase a stream of income for life with their savings. Unfortunately, we’ve seen abusive sales practices in the annuity industry and their impact on 403b retirement plans. Hopefully this doesn’t open the door for rampant bad behavior in the 401(k) market.
Overall, the good outweighs the bad in this bill. There are new incentives to encourage small businesses to offer retirement plans – including tax credits for setting up new plans with the automatic enrollment feature. Anything that makes it easier for a small company to start a retirement plan benefit, is a win in my book.
The loss of the Stretch IRA only affects those who have more than enough saved for retirement, and the wealthy will find workaround solutions. The delay in Required Minimum Distributions gives retirees more time to implement other tax strategies between their retirement date and the RMD beginning date. Allowing workers of any age to contribute to an IRA makes sense. The IRA withdrawal exception for birth or adoption gives new parents relief during a very expensive time in life, and 529 plan are the logical place to search for funds to pay off student loans.
(h/t to our CFO Bill Sweet for providing me with most of this information)
