The SECURE Act May Bring Big Changes to Retirement

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:

Age limit removed for Individual Retirement Account (IRA) contributions

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.

• Why This Matters: People are working longer and living longer, so it makes sense that people have more time to contribute to their retirement accounts as long as they have earned income.

Required Minimum Distribution (RMD) age extended to 72

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.

• Why This Matters: Again, people are working longer, so the additional time to earn income may further contribute to an increase in retirement savings. The delay in the RMD age can also help your retirement account continue growing.

Stretch for inherited IRAs eliminated

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.

• Why This Matters for Estate Planning: If this provision becomes law, estate planning around inherited retirement accounts will need to be revisited. For many, the naming of a revocable trust as the beneficiary of a retirement account may cause more harm than good, because many revocable trusts require RMD distributions to be passed onto a beneficiary. As a result, we’ll likely see more use of trusts like retirement trusts, which will help ensure RMDs stay protected in the trust, rather than being forced to be paid out to a beneficiary.
• Why This Matters for Retirement Account Inheritance: Roth conversions may also become more relevant for intergenerational planning. Conversions ensure that the retirement account is tax-free once inherited, eliminating the income impact of the 10-year withdraw requirement. This is particularly important because many who inherit retirement accounts are approaching or in their peak earning years, and any additional income from retirement distributions could catapult them into a higher tax bracket.

Penalty-free withdrawals for parents

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.

• Why This Matters: It’s no secret that having and raising children requires significant funds. These provisions may provide additional income for families when they need it most.

More annuity options in retirement plans

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.

• Why This Matters: By reducing liability, the chances are that more employers will offer annuities within their 401(k) plans. Currently, only 9% of employers offer annuities, according to Vanguard Group Inc.¹ This provision would allow those who are seeking a steady income to buy an annuity in a 401(k) retirement plan. With the ever-shrinking usage of pension plans and the shift for retirement planning from employers to employees, annuities may potentially offer a source of guaranteed income. Speak with you financial advisor if you have questions about or are considering an annuity.

Strengthens lifetime income disclosures

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.

• Why This Matters: This disclosure would illustrate your retirement account balance as a monthly income stream, helping to reframe the dollar amount as something more tangible. Similar to the way you would use your monthly income, or paycheck, to determine your cash flow, this monthly dollar amount may help in framing how much you’ll have during retirement.

Repeal of kiddie tax at trust tax bracket

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.

• Why This Matters: The changes to the kiddie tax mean that children’s unearned income, such as capital gains, dividends, and interest, are taxed at much higher rates. This provision may eliminate the unintended consequences for low-income students receiving scholarships, and for child survivors of first responders and military.

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.

¹MarketWatch: https://www.marketwatch.com/story/why-you-dont-yet-have-an-annuity-in-your-401k-2014-12-12