November 4, 2019
Earlier this year, the House of Representatives passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act. (Acronyms are kind of a thing in Congress.) As the name implies, the bill has important ramifications for people’s retirement savings. We want to give you a preview of what the bill is designed to do.
Now, before we do that, it’s important to note that the SECURE Act must first be passed by the Senate and then signed by the president before it actually goes into effect. Many things in the bill could change before that happens, though, so it’s impossible to know exactly what the final law will look like. And of course, it’s always possible the Senate could choose not to pass the bill or make so many changes that the House decides to rework their version.
That said, the SECURE Act enjoys bipartisan support. In fact, only three members of the House voted against it, with 417 members voting for.1 So it’s expected the Act will become law sometime soon. As financial advisors, it’s our job to get familiar with the bill, so we can help individuals prepare for the changes it will bring.
What is the SECURE Act?
The SECURE Act does many things, but at its core, it’s designed to help more Americans save for retirement. Many of the bill’s provisions are designed specifically for businesses, which we won’t discuss in this post. But there are also provisions that impact regular individuals, including pre-retirees, the recently retired, and even their children. None of these changes are particularly dramatic, but they are important, nonetheless.
Changes to IRAs and 401(k)s2
One of the changes the bill makes is lengthening the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½. Once they hit this milestone, they are required to begin making withdrawals, called required minimum distributions. Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.
Another change the bill makes is for new parents. Under current law, you must be 59½ years old to make withdrawals from a traditional IRA or 401k. If you withdraw money earlier than that, you would have to pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if you need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money you contribute to your retirement accounts to be saved for retirement.
Under the SECURE Act, new parents will also be able to withdraw funds penalty-free. This is to help cover birth and adoption expenses, and it’s especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they would need to be made within one year of the birth or adoption.
Changes to inherited IRAs2
Another important change – especially from an estate planning perspective – regards inherited IRAs.
For years, one of the more popular estate planning strategies has involved the use of Stretch IRAs. When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs. Under current law, the beneficiary can take distributions from their inherited IRA based on their official life expectancy. This allows them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period of time. For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.
If the SECURE Act goes into law, this will no longer be possible. Instead, the beneficiary must take out 100% of the IRA’s assets within 10 years of the original owner’s death. As distributions are taxable income, this could have a major impact on the beneficiary’s tax situation.
Some of you reading this are older, some younger; some nearing retirement, some far away; and some already there. While no single provision will affect everyone, almost everyone will be affected in some way.
As we mentioned, the SECURE Act has not yet become law, and it’s uncertain when the Senate will vote on it. That said, it’s important that you start planning ahead. If you have any questions about the SECURE Act, please let us know.
1 “Congressional Leaders Want SECURE Act Passage in 2019,” Plan Sponsor, October 7, 2019. https://www.plansponsor.com/congressional-leaders-want-secure-act-passage-2019/
2 “Text of H.R. 1994,” Congress.gov, 6/3/2019. https://www.congress.gov/bill/116th-congress/house-bill/1994/text