In a widely touted bipartisan effort to shore up the country’s “retirement crisis,” the House Ways and Means committee, which handles tax policy in the U.S. House of Representatives, passed the “Secure Act” earlier this week. The bill passed through the committee with unanimous approval and would increase the flexibility of 401(k) plans and improve access to accounts for small businesses and their employees. The Secure Act is receiving a great deal of media attention for being one of a very few bipartisan bills that could end up as law in today’s highly partisan environment. The legislators themselves wasted no time when it came to self-congratulation, with committee chairman Richard Neal (D-Massachusetts) observing it is a “major bipartisan accomplishment” and “The Ways and Means committee is where we find solutions to get things done for the American people.”
The “SECURE” in “Secure Act” is an acronym. It stands for Setting Every Community Up for Retirement Enhancement. Essentially, the act is designed to incentivize Americans to begin saving for their own retirements via employer-sponsored 401(k) plans and individual retirement plans. These activities are already incentivized via tax advantages associated with placing money in 401(k) or IRA accounts, but the new bill is designed to “modernize” the IRA and 401(k) system, which has largely replaced pension plans, said chief government officer at the Insured Retirement Institute Paul Richman.
“It is packaging [incentive efforts and reforms to IRAs and 401(k)s] all into a comprehensive piece of legislation that would address many of these little issues that have cropped up over the years,” said Richman. He added there have been other attempts to bring legislation around these accounts current but “those efforts have stalled on their own.”
What the Secure Act Will Do
If passed in its present form, the Secure Act is intended to address multiple facets of the retirement-saving issues that face Americans today. Namely, according to legislators, that Americans are not availing themselves of these accounts, not saving once they have them, and may not be able to access them through employers should they want them.
In its current form, the Secure Act would address the issue of availability by:
- Permitting long-term part-time workers to participate in 401(k) plans
- Expand safe harbors for employers who include options like annuities in their plans
- Offer expanded tax credits to employer who create plans and encourage autoenrollment
In its current form, the Secure Act would address the issue of savings by:
- Permitting contributions to traditional IRAs beyond the age of 70½
- Raising the age at which an account holder must take required minimum distributions (RMDs) to 72, up from 70½
- Allow automatic escalation of contributions to go as high as 15 percent of pay, up from the max 10 percent allowed at present
- Enabling graduate students and post-doctoral students to save for retirement based on stipends and fellowships, which is currently not permitted, and allowing home-healthcare workers additional savings options that are currently prohibited
- Allowing penalty-free withdrawals in the event of birth or adoption, which legislators say will “assuage concerns” younger savers have about being able to take maternity leave and, as a result, save more for retirement
The legislation could also allow greater portability for lifetime income products between plans. This is of particular interest to the insurance industry, which has lobbied hard for the bill to succeed since it would likely be the biggest provider of “lifetime income products.”
The Secure Act Could End the “Stretch IRA”
The Secure Act, if passed, could eliminate a key long-term benefit to retirement accounts, however. At present, qualified parties can take inherited IRA and 401(k) distributions over the course of their lifetimes. This has long been an incentive for account holders to save aggressively in these accounts, knowing that they will serve as an effective means of passing down an inheritance in the event that the account holder does not use the entirety of the funds in the account during retirement. Under the Secure Act, withdrawals made from an inherited IRA or 401(k) would have to be completed within 10 years of the original account holder’s death.
This expedited withdrawal requirement on inherited IRAs would effectively place funds in the IRA that might be growing in tax-advantaged status on a much, much shorter timeline and enable the government to tax those funds and any additional growth sooner. At present, since inherited IRAs do not have this requirement, an heir may leverage the tax-free growth of the funds in a retirement account as long as they wish.
Changes to Education Savings Accounts
The Secure Act also tackles Section 529 education savings accounts (ESAs), which are not part of the retirement savings conversation directly. It would permit accounts to fund apprenticeships and homeschooling expenses, currently not permitted. The current manifestation of the bill would also enable 529 account holders to pay up to $10,000 in student-loan debt off using funds from those accounts. This change could enable households to circumvent a common problem experienced when paying for college when a grandparent 529 account interferes with financial aid eligibility. Mark Kantrowitz, publisher of SavingForCollege.com, suggested grandparents could wait to use their 529 plans until the beneficiaries are “out of school and in debt.” Of course, that assumes the family does not need the funds in the plan to get the child through school in the first place.
Nothing is Set in Stone
Of course, at present, the Secure Act is nothing more than a proposed piece of legislation getting a lot of positive media attention because republicans and democrats managed to vote for it in spite of each other in a House committee. As the bill moves into the House and Senate, it could change dramatically. However, all that positive press and pressure from the insurance industry makes it more likely than not that some version of the Secure Act will eventually pass into law, so investors already using IRAs and 401(k)s to invest should keep a close eye on this legislation and be prepared for how it may affect retirement planning, tax strategy, and estate planning.
What do you think?
- Is this an “impactful” piece of legislation as far as your retirement savings are concerned?
- Will it help you to be able to contribute longer and avoid RMDs a couple more years?
- Are you concerned about the potential loss of the stretch IRA?
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