Recently, I’ve gotten a few questions about the proposed SECURE (Setting Every Community Up for Retirement Enhancement) Act that the House has proposed. Any time there is legislation on the table that affects retirement savings, many want to know more.
The genesis behind what is being proposed is that Americans are terrible savers. The government is trying to implement legislation that will promote a better retirement savings environment.
There are 29 changes being recommended, not to mention the Senate’s proposed Retirement Enhancement Savings Act (RESA), which will more than likely add some additional previsions. As much fun as reading through an article on 30 plus law amendments is, I’m going to focus on the top 9 major ones, as I see it, and give my thoughts.
The Top 9:
1. Eliminating the current age cap (70.5) for contributing to a Traditional IRA – Today, once you hit age 70.5, you are no longer eligible to contribute to a Traditional IRA if you are still working. This proposed law would allow individuals to have no age cap on contributing to a Traditional IRA, so long as you still have earned income. This is currently the case with Roth IRA’s. Therefore, this would make these two IRA accounts the same from a contribution stand point. It is no secret we are living longer and thus working longer. So, why not allow for longer retirement savings. I’m in favor of this provision, as it’s adjusting for the current times.
2. Increasing the age at which RMDs begin to 72 (up from 70.5) – I have many clients who take money out of their IRAs because they have to, not because they want to. This provision kicks forward the age at which they are required to take that first installment. Naturally, a change like this will have a rather large impact on our country. It would allow for an extra year and a half of tax deferred savings for those who wish to benefit. This is another provision I like. There is no reason not to adjust the first year of IRA withdrawals to be aligned with our aging demographic.
3. Requiring employers to disclose on employees 401(k) statements the amount of sustainable monthly income their account balance will support – This is an interesting one being proposed. The government wants a projection on your statements for what your balance will sustain (at a monthly value) through your lifetime. I have more questions on this one than I have answers. For now, I would give it a lukewarm rating. I’d like to know how they calculate this formula and what they assume for duration of payments. Which actuarial tables are they using? This change crosses the line into financial planning and I’d hate for the unintended consequences to be people having a false sense of security.
4. Making it easier to convert employer retirement plans into lifetime annuities to fund that monthly income – This provision would take away some legal restrictions and allow 401(k) companies to more readily offer annuity options in their offerings. It would also make it easier to make these annuities portable to other retirement accounts when the employee leaves. This one scares me to be honest. I am not anti-annuity by any means, but there are a lot of nuisances to these products that are often misunderstood. If appropriate, an individual can roll these balances out at some point to any IRA annuity of their choice. I’m not so sure making this option a simple default would be properly utilized. The risk here might not be worth the reward.
5.Help for small business owners offering retirement plans – This one is interesting and outside the box. The SECURE Act is proposing a handful of options to help cut cost and incent small business owners to offer retirement plans. They are doing this a few different ways. First, by offering a 50% tax credit for the startup costs of a retirement plan. Second, by creating a $500 tax credit for retirement plans that offer, or convert their current plans to, automatic enrollment contributions.
Third, it would allow for multiple small businesses to pool their 401(k) assets together and reduce costs through economies of scale. I’m in favor here as I am a small business owner. I’m certainly for cutting costs when I can. If only they could do something to cut health care costs, then I’d really be on board!
6. Allowing up to $5,000 of penalty-free distributions from retirement accounts to cover birth or adoption expenses – This one seems self-explanatory for the most part. The SECURE Act would waive the 10% early withdrawal penalty to cover birth and adoption expenses. It is important to note, this does not waive the ordinary income tax due on these dollars, rather just the 10% penalty. I like this provision to a degree. I, for one, don’t want people going to debt for a miracle like having/adopting a baby. On top of that, many people having children are still earlier in their career. They might only have retirement savings and not a ton of liquidity. Why not allow a little reprieve on these costs? Also, since it is only $5,000, I don’t see it doing that much damage to one’s retirement future.
7. Allow part-time workers to contribute in 401(k) plans – The current rule states if an employee doesn’t work 1,000 hours a year, they are not eligible to contribute to that company’s 401(k) plan. However, this feature would give employees who are 21 years of age, or older, and who have worked 500 hours for the past 3 year’s eligibility to contribute to their company’s 401(k) plan. This one I like. It promotes more savings for part time employees who, in many circumstances, could really use it. A lot of these part time employees may have a significant other who works full time and has a sizeable income, but they themselves are excluded from contributing. I also like that it rewards loyal employees who have been working at one company for 3 years.
8. Allowing tax–free withdrawals of up to $10,000 from a 529 college savings plan to repay student loans – This is big! It’s also one of the provisions that doesn’t speak to retirement savings. If passed, you could use $10,000 of 529 balances to pay down a student’s qualified education loan(s). This is an aggregate figure, but can be done for each sibling in a household. I love this feature. I don’t have any argument against it other than why not allow a greater sum than $10,000? I guess I should leave well enough alone, right?
9. Eliminating Stretch IRAs – Well, I saved the worst for last. If passed, it would require non-spouse IRA beneficiaries to withdrawal all funds from an inherited IRA within 10 years of receiving the funds. The current law allows non-spouse beneficiaries to “stretch” these withdrawals over their life time. I get why this is being proposed–taxes. But, I feel we pay enough taxes as it is. To say I hate this provision would be putting it lightly. There will be certain exclusions, but by-in-large, this is what is being proposed. The only way I see to avoid this one is simple, vote for Andrew Rosen in 2020! Catchy, isn’t it?
As I stated earlier, there are many other provisions to this plan. Although plenty of revisions are likely to happen, it does seem something will get passed in 2019. At the end of the day, most of this is helpful and being a big proponent of financial literacy. It has my vote!