It appears that concern over the retirement readiness of American workers has reached a point where both Houses of Congress are poised to pass new legislation with broad bipartisan support. The House version of the legislation is called the SECURE Act and has twenty-six individual components impacting either an employer’s ability to offer retirement benefits to its employees or an employee’s ability to save more easily and effectively for retirement. Here is a quick summary of the more impactful provisions:
- Multiple-Employer Plans (MEP’s)- Small employers are often discouraged from offering retirement plans due to the corresponding cost and administrative burden. The SECURE Act expands on previous efforts to allow small employers to band together to form Multiple-Employer Plans thereby sharing costs and admin duties. The act broadens and liberalizes the rules allowing small firms that do not share a common geographic area, trade, industry, or profession to join the MEP and insulates the individual members from liability stemming from fiduciary violations of other members.
- Increased eligibility of long-term, part-time employees as plan participants by lowering the required hours from 1,000 per year to 500 per year for three consecutive years.
- Increased business tax credit to offset the cost of new start-up retirement plans — up from a maximum of $500 to $5,000 under certain circumstances.
- New business tax credit of $500 for 3 years for plans that offer auto enrollment for new hires.
- Delayed Required Minimum Distributions (RMD’s) from 401k and other defined contribution plans. Currently, participants must begin taking these required distributions by age 70.5. The act proposes an increase to age 72.
PLANNING IMPLICATION: this may allow individuals additional time to utilize ROTH conversions to take advantage of lower tax brackets before being required to start distributions.
- Repeal of maximum age for traditional IRA contributions. This provision reflects the reality that many Americans continue to earn income beyond age 70. These individuals could continue to make IRA contributions and these contributions could take a number of forms; pre-tax, spousal or non-deductible.
PLANNING IMPLICATION: additional flexibility to take advantage of tax strategies that will help those who continue to work past 70, even part-time workers. This may be especially useful for high earners where one spouse has already retired.
- Penalty-free withdrawals from retirement plans to help with the costs of giving birth or adopting, up to $5,000 within one year.
- Stipends and non-tuition fellowship payments for graduate and postdoctoral students will be considered income for purposes of IRA contribution eligibility. This will allow these individuals to make tax-favored contributions for retirement.
PLANNING IMPLICATION: this is great news for those looking to save or take advantage of low earning years before being phased out of using such saving tools due to high income careers.
- Expansion of 529 college savings plans. While not directly related to retirement savings, this provision would allow 529 plan funds to cover the costs associated with registered apprenticeships and homeschooling. In addition, up to $10,000 could be used for the repayment of qualified student loans as well as private elementary, secondary and religious schools.
- Modifications to Minimum Distribution Rules for retirement account beneficiaries: The proposal contains one major provision that may significantly impact non-spouse beneficiaries when inheriting pretax retirement accounts. Under existing law, they can utilize a strategy often referred to as a stretch IRA. Effectively, the beneficiary can stretch out the Required Minimum Distribution of the account over their remaining lifetime thereby minimizing the tax due. Under the new law, non-spouse beneficiaries will have to distribute the entire balance by the end of the 10th calendar year following the death of the retirement account owner.
PLANNING IMPLICATION: the change to non-spouse beneficiary rules will have huge tax implications for those who inherit a traditional IRA. There may be opportunities to pay less tax by accelerating Roth conversions while still alive depending on the beneficiary’s tax situation. Generational tax planning will start to play a larger role for those with big IRAs.
If the law eventually passes, you should discuss the impacts with your financial advisor. The final version of the law, after going through both houses of Congress could be different than the existing proposal.
Winfred Jacob, CFP®
Senior Financial Advisor