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SECURE-ing Retirement

A legislative proposal working its way through Congress has the potential to meaningfully impact your retirement savings.

An African-American couple happy in retirement.

Nearly 25% of non-retired American adults have no savings or pension, according to a recent Federal Reserve report. As a result of growing awareness and concern about this issue, Congress has prioritized legislative reforms to the pension and retirement system. In May, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act by a vote of 417-3. The 29 provisions outlined in this bill aim to modify the requirements of, and provide enhancements for, employer-provided retirement plans such as 401ks, individual retirement accounts (IRAs), and other tax-favored savings vehicles (e.g., 529 plans).

Although the Senate has yet to pass the SECURE Act—and, in fact, has its own version of this bill called the Retirement Enhancement and Savings Act (RESA)—we want to highlight some key provisions within the bill that, if passed, could have implications for clients.

IRA Required Minimum Distributions

Currently, individuals must start withdrawing from their retirement savings accounts at age 70 ½. The SECURE Act increases the required minimum distribution (RMD) age to 72. The goal of this provision is to address the risk many Americans face in retirement of outliving their savings. Delaying the withdrawal period allows more time for tax-deferred growth in the account.

These changes would not affect IRA owners who are currently taking RMDs from their accounts; rather, this provision would apply to anyone turning 70 ½ in 2020 or later.

IRA Contributions

The current law mandates that no one over the age of 70 ½ can contribute to an IRA. The SECURE Act removes this age limit. This provision recognizes that many Americans work later in life and/or have some form of earned income which would be beneficial to contribute to an IRA.

Reducing the Stretch

One of the bill’s more controversial provisions is the elimination of the so-called “stretch IRA.” Currently, a non-spouse beneficiary can stretch the RMDs from their inherited IRAs over their own lifetime. This allows more of the money in the account to grow tax-deferred and helps to minimize the beneficiary’s income tax.

The SECURE Act requires inherited accounts to be withdrawn within 10 years, essentially accelerating the tax due on the account and minimizing the tax-deferred growth. This may impact beneficiaries of large accounts who, under the new law, will face significantly larger withdrawals and, as a result, larger tax obligations.

529 Plans

This is the area of the bill over which debate continues in the Senate. The House version of the bill that passed allows for expanded 529 savings plan distribution options to cover the costs of apprenticeships and allow for repayment of up to $10,000 of student loans. Some Senators would like to add a provision allowing 529 expenses to be used for home schooling. Though the Tax Cuts and Jobs Act of 2017 expanded 529 plan benefits to include K-12 education expenses, it did not address homeschooling.

In light of the proposed changes, below are recommended steps for financial planning:

  1. Review your beneficiaries. On an annual basis, we recommend reviewing the beneficiaries listed on your accounts to ensure they are accurate. Additionally, in light of the SECURE Act’s proposed changes, knowing which of your accounts have non-spousal beneficiaries associated with them can be helpful for estate and tax planning purposes.
  2. Review your trust(s). With the SECURE Act’s proposed elimination of the stretch IRA, it could be more advantageous for both estate and tax planning purposes to utilize charitable trusts and/or life insurance trusts. Whether this remains true will, of course, depend on the final version of the bill.
  3. Consider Roth IRA conversions. Some individuals may benefit from converting a portion of their traditional IRA to a Roth IRA. Roth IRAs will be subject to the same ten-year distribution rule mentioned above; however, a Roth IRA conversion will reduce the balance in your traditional IRA, thus reducing your beneficiaries’ tax liability. Under the SECURE Act, completing (and paying taxes on) a series of Roth IRA conversions over a period of years could be more advantageous than your heirs having to pay income taxes on the accelerated distributions.

The Times They Are A-Changin’

Debate and lobbying around this legislation continues in the halls of the Senate ahead of a vote on the floor. We will keep a keen eye on developments from the Hill and will inform clients of any material changes. While we do not know exactly what will be contained in the final version of the bill or the timing for when it will be signed into law, we do know that, as Bob Dylan once sang, the times they are a-changin’.

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