…recently passed the SECURE (Setting Every Community Up for Retirement Enhancement) act with an almost unanimous vote. It includes 26 measures which will now be reviewed and possibly passed in the Senate. It is important to note that the Senate has its own bill aimed at retirement enhancements which was already on the table prior to the House’s bill, so nothing is final yet. Let’s unpack some of the measures in the act that may impact your retirement if they are written into law – and I’ll break down the one measure that has financial advisors crying, “Foul!”.
There are several measures aimed at helping small businesses to provide employer plan options and encourage greater participation. There are recommendations which incentivize employers to utilize auto-enrollment policies for their employees, increasing the amount they can automatically deduct. There is also a proposed increase to the tax credit companies could receive if they utilize an auto-enrollment program to help them with the setup costs. Also, there are measures which would allow small businesses to work together to provide an employer plan with a goal of limiting costs to each and making it more feasible for them to afford.
There is a measure which would allow long-term, part-time workers to participate in 401(k) plans. Current law excludes employees who work less than 1,000 hours per year from eligibility, but the new law proposes that a part-time employee could be eligible after 1 year at 1,000 hours or 3 years of at least 500 hours. This would help those who are currently only qualifying for a spousal IRA to utilize their employer plan to save additional funds for retirement.
Required Minimum Distributions currently require individuals to begin exposing their IRA and most employer-plan assets to tax shortly after they reach age 70 ½. The new act proposes that this be moved to the year they reach 72 to account for increases in life expectancies. Also, there is a proposal to remove the age limit for contributing to traditional IRAs which is currently at 70 ½ as well.
One measure you may find interesting is the proposal for penalty-free withdrawals from retirement plans for “qualified birth or adoption distributions.” Especially for those who have been working to save for adoption, this measure may be one to watch if it becomes law as a possible way to use pre-tax dollars for those expenses. Of course, the distribution would create taxable income, but the penalty for distributions prior to age 59 ½ would be waived under the current proposal.
Have you been homeschooling? You may find it interesting that the new bill proposes that 529 education accounts could be utilized to homeschooling, apprenticeships and up to $10,000 of qualified student loan repayments along with the private school options currently available.
There is only one measure that our team finds troubling. It has to do with how assets which were in pre-tax accounts (IRAs and employer plans) are treated upon the death of the account owner. Currently, if an investor passes away with a large sum between his pre-tax, taxable accounts, his beneficiary has the option of stretching out the distributions over his/her lifetime, but is required to take a minimum distribution each year. The proposed act changes this rule dramatically. Under the proposed act, unless the beneficiary meets specific criteria, she will no longer have the option of stretching out those distributions. Instead, the beneficiary will have no more than 10 years to distribute the entire balance. Now, consider the impact this will have on estate plans that currently exist or in the case of an adult child who receives a large inheritance. The tax implications could be substantial. With what the industry has dubbed, “The death of the stretch IRA,” investors who may be leaving a legacy for the next generation will need to be mindful of the implications this has on their plan.
We at GenWealth Financial Advisors will continue to educate ourselves on the many facets of this act as it works through the Senate to determine how to best serve our clients once the law is complete and the application of the law begins to take shape. If you would like to learn more and have someone on your side to help you navigate what may lie ahead for you, please contact our team at email@example.com today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.