The Setting Every Community Up for Retirement Enhancement Act (“SECURE”) could bring significant changes to retirement planning. Here are some key provisions, and why they matter.
The House recently passed the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) which could significantly change the landscape of our US retirement system But before it can be signed into law, the SECURE Act must pass in the Senate. While a specific date is not set, all indications point to the Senate moving quickly to a vote on the SECURE Act, especially since the House bill is bipartisan, having passed 417–3. Here are some of the provisions included in the SECURE Act:
Right now, the age cap for contributing to a traditional IRA is age 70½. The SECURE Act would remove this cap so that people can make contributions to their retirement accounts at any age. Since Roth IRAs don’t have age limitations for retirement contributions, this bill would also bring these differing retirement accounts into alignment.
Currently, you need to start taking required taxable withdrawals from 401(k)s and IRAs at age 70½. If you don’t take any distributions, or if the distributions aren’t big enough, you may have to pay a 50% excise tax on the undistributed amount. The SECURE Act would extend the RMD age to 72. Note: The Senate also has a retirement bill (the RESA Act) it’s working through; the RESA Act would push the RMD requirement age even further, to age 75.
If you leave behind retirement accounts for your beneficiaries, your beneficiaries could typically “stretch out” the distributions from these accounts over their lifetime. Upon the passing of an IRA owner, inheriting beneficiaries can choose to either take the distributions over their life expectancy, or take the assets over a 5-year period. These distributions begin in the year after the plan owner’s passing, and the inheriting beneficiary cannot defer the RMDs until he/she is age 70½, unless he/she is a surviving spouse.
With the SECURE Act, those who have inherited IRAs will need to withdraw account balances within 10 years of inheritance (with exceptions for spouses and minor children). The Senate bill proposes a withdrawal period of 5 years. If signed into law, this change would go into effect for those who die after December 31, 2019.
The SECURE Act also includes provisions for parents to use their retirement money for their children. One provision would allow new parents to take penalty-free distributions from their 401(k)s or IRAs within a year of the birth or adoption of a child to cover related expenses, up to $5,000. Another provision would enable parents to withdraw up to $10,000 from 529 saving plans to repay student loans.
This provision would create a safe harbor for employers to offer annuities within their 401(k) plan, meaning that employers will have clearer protections against liability if they choose annuity providers who later have financial difficulty.
The SECURE Act would also require retirement plan providers to deliver a lifetime income disclosure to participants – the amount of sustainable monthly income your retirement account balance could support – at least once every 12 months.
The 2017 Tax Cuts and Jobs Act changed how we treat income associated with children by applying the trust tax bracket, resulting in income being taxed at the highest tax bracket once income exceeds just $12,500 (n comparison, a married couple reaches the highest tax bracket after taxable income exceeds $612,350.) This provision of the SECURE Act would seek to reverse this so that the kiddie tax would return to the parents’ marginal tax bracket.
What’s Next: The SECURE Act needs to pass the Senate before it can be signed into law. The Senate also has a similar bill in committee that could move quickly to a vote. However, recent insight from the Senate indicates they are likely to vote on the SECURE Act rather than trying to pass their own bill, which would require reconciliation of the two bills before passing.
We will continue to update you as this legislative measure makes its way through the political process.
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