SECURE Act Could Lead to Major Retirement Savings Plan Changes
After a number of bills focused on retirement reform were introduced to Congress late last year, we’re starting to see our first real signs of change in 2019 legislation. The Setting Every Community Up for Retirement Enhancement Act (aka the “SECURE Act”) was passed by the House of Representatives on May 23. It is expected to be voted through the Senate within this term, as well.
There are a lot of facets to the SECURE Act that could lead to major changes that will affect retirement savings plans such as Roth IRAs, 401(k)s, Social Security, health savings accounts (HSAs) and employee pensions. The Senate also already has another bill before it called the Retirement Enhancement Securities Act (RESA). Most likely, issues from that bill will be folded into the SECURE Act along with other final Congressional committed modifications before it is ultimately signed into law.
We won’t get into everything here, but I wanted to highlight a few of the significant changes being proposed in the SECURE Act:
Small Employers Will Have More Access to Retirement Plans
Many smaller businesses desire to offer retirement plans, but it is just not feasible for a lot of them under current laws. This bill potentially expands the options for small employers to band together and run multi-employer 401(k) plans that would cost less and decrease fiduciary liability.
Age Limitations Removed on IRA Contributions
Under current rules, you can no longer contributed to an individual retirement account (IRA) after the age of 70.5. The SECURE Act would remove this limitation, which would benefit those who wish to work later in life and keep saving.
Change to Minimum Distribution Age
As it is now, the law requires anyone over that age of 70.5 to take out what are called required minimum distributions (RMDs) from their retirement accounts. The SECURE Act proposes changing this to age 72 while the RESA proposes 75, so it will be interesting to see what ultimately gets passed.
Increased Annuity Options Inside 401(k)s
Not many 401(k) plans offer annuities as an investment option, but that could change with this new bill. It may decrease liability in picking annuity providers within the plan, so that would open up the path for more annuities to be offered to plan holders.
Automatic Enrollment Tax Credit
As a way to increase automatic enrollment for smaller employers, the SECURE Act proposes offering a new $500 tax credit that can offset some of the initial expenses of setting up a plan for employees.
Child Birth or Adoption Distribution Exemptions
Currently, all early withdrawals from an IRA are subject to a 10 percent tax penalty. Lawmakers are proposing to add in an exemption for new parents (via child birth or adoption) of up to the aggregate amount of $5,000. It would still be taxable income, but not subject to the additional 10 percent tax penalty.
Modifications to IRA Inheritance Provisions
The SECURE Act aims to change how long a beneficiary has to spread out distributions after inheriting an IRA from a loved one. The current system allows for these distributions to be spread out as long as the beneficiary wants—potentially over the course of their entire lifetime. The new bill is pushing to limit these distributions to a 10-year period. This change mostly affects people who inherit very large retirement accounts and will be facing additional tax burdens with quicker distributions. Anyone in this position will want to have a trusted financial advisor and estate planner on their side.
What do you think about new proposed new retirement plan changes? You can see the entire bill as it is written now here.
Let us know what you think and stay tuned to the Illumination Wealth Blog this entire month for more tips, news and information about retirement plans and retirement savings. If you need help planning for your retirement or setting up a 401(k) for your business, contact Illumination Wealth today.