Significant changes to current retirement account law is currently making its way through Congress. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 has now passed the House of Representatives. The Senate will likely be voting on their version of a retirement savings bill this summer entitled the Retirement Enhancement and Savings Act (RESA). Typically, the two chambers would each pass their own version of the legislation and then the two would be reconciled prior to being sent to the President for approval. There are reports in Washington that these changes have bi-partisan agreement and they are hoping to come to an agreement on the provisions prior to the Senate’s vote thereby expediting the process for approval. If passed by Congress, this legislation will affect a broad range of retirement accounts including IRA’s, 529 plans, and 401(k) plans. Here is what you need to know about the proposed changes:
(Disclaimer: This article provides a summary of the most important changes being proposed. To read the bill in its entirety, please click here.)
Required Minimum Distributions (RMD’s):
The current law requires that individuals generally begin taking distributions from their retirement plans at age 70 ½. The SECURE Act increases the age at which distributions are required from 70 ½ to 72.
The current IRA rules do not allow contributions into an IRA after the age of 70 ½ even if an individual is still earning income. The SECURE Act eliminates this restriction and will allow IRA contributions if an individual has earned income no matter their age.
Qualified Birth and Adoption Distributions:
Based on current IRA rules, most withdrawals from a retirement account are subject to a 10% early withdrawal penalty if they are taken before you reach 59 ½. However, there are certain exemptions allowing a penalty-free withdrawal. The SECURE Act adds an additional exemption for any “qualified birth or adoption distributions”. The aggregate amount of a penalty-free withdrawal for this purpose cannot exceed $5,000. The withdrawal can be taken at any time within the first 12 months from the child’s date of birth or from the date the legal adoption is finalized.
Inherited IRA Account Distributions:
Based on the current IRA rules, an individual who inherits an IRA account is required to take out a certain amount of money from the account each year and count it as taxable income on their tax return. This amount is calculated by taking the balance of the account at the end of the prior year and dividing by the life expectancy of the individual who inherited the account. This allows them to benefit from substantial tax deferred growth. For example, if a 20-year-old beneficiary inherited an IRA from their grandfather, they can currently keep their money in an inherited IRA growing tax deferred over the next 60 to 70 years with small distributions being taken annually. The SECURE act eliminates this potential by stating that those who do not qualify as an “eligible designated beneficiary” will be required to liquidate the inherited account within 10 years from the date of death of the original account owner. The only individuals who will not be subject to the 10-year rule are surviving spouses, minor children until they turn the age of majority, disabled or chronically ill individuals, or individuals who are not more than 10 years younger than the original account holder.
Expansion of 529 Plans:
The SECURE Act expands 529 education savings accounts to cover costs associated with:
- Registered Apprenticeships
- Private elementary, secondary, or religious schools
Using a 529 plan for Student Loan Payments:
The SECURE Act will allow up to $10,000 of qualified student loan repayments (including those for siblings of the 529 plan account holder) to be treated as a “qualified education expense” and therefore not subject to Federal tax or withdrawal penalties that would otherwise have applied.
Employer Plan Provisions:
The SECURE Act contains multiple 401(k) plan changes that affect employers who administer plans including items such as auto enrollment, safe harbor rules, increased tax credits for small businesses, loan provisions, portability of lifetime income options, plan adoption deadlines, and fiduciary safe harbor for selection of lifetime income providers. These changes are beyond the scope of this article.
Allowing Long-Term Part-Time Workers to Participate in 401(k) Plans:
Under current law, employers generally may exclude part-time employees who work less than 1,000 hours per year when providing a retirement plan. The SECURE Act will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.
As discussed in the introduction, the bill has yet to be voted on in the Senate and these provisions are subject to change. Once the bill receives final approval by Congress, I will provide my thoughts on the planning implications of these changes in a separate article. If you would like to learn more about how I can help with your specific retirement plans, please give me a call or click here to schedule a time on my calendar.