You may have been hearing a lot about the SECURE (Setting Every Community Up for Retirement Enhancement) Act in the news lately.
The bill was passed by the House in May 2019, but is still being reviewed in the Senate. It’s gathered a lot of bipartisan support and while the bill may not be passed exactly as first presented, there’s a good chance that some variation of it will become law.
It addresses three long-recognized and growing issues associated with both employer-sponsored and individual retirement plans:
- Lack of availability of employer-sponsored retirement plans.
According to the Stanford Center on Longevity, only about 50 percent of American workers don’t have access to any sort of retirement plan through their job. The SECURE Act proposes wider 401(k) coverage by allowing multiple employers in different industries to join together under a single retirement plan. This would help small companies offer better, less expensive retirement plans to their employees. A sophisticated retirement plan with a good array of low-cost investment options is, at the moment, generally VERY expensive for both employers and employees.
- Rules about contribution limits and age restrictions are largely outdated. The SECURE Act proposes pushing back the start date on required minimum distributions (RMDs) from age 70 ½ to age 72. This would benefit retirees by allowing them to put off facing the tax consequences of RMDs.
It also proposes allowing IRA contributions past the current cut-off of age 70 ½, which would give older workers who delay retirement even longer to save.
Finally, it proposes allowing long-term, part-time workers to participate in retirement plans. This is a big deal because most employer-sponsored retirement plans require employees to work at least 1,000 hours in a calendar year in order to join the plan. Under this bill, non-union employees who are at least age 21 and have worked at least 500 hours in the last three consecutive calendar years would be allowed to participate in their company’s 401(k) plan.
- Difficulty in planning the transition from saving for retirement to collecting retirement income.
Among other things, the bill would allow retirement plans to offer annuities as an investment option. It would also require 401(k) plan statements to detail lifetime income streams.Supporters of the bill say this disclosure would help workers understand what they need to save to close the gap in their retirement savings.
What are the downsides?
The biggest controversy over the SECURE Act is that it would change the rules for inherited IRAs for non-spousal beneficiaries.
Right now, a non-spousal beneficiary who inherits an IRA can keep that money in the account for years—based on their life expectancy—without having to take a distribution (which would be a taxable event). This feature is beneficial for estate and tax planning. These inherited accounts are called stretch IRAs because non-spousal beneficiaries can “stretch” holding the account over their lifetimes.
But the SECURE Act proposes that assets in an inherited IRA must be withdrawn by a non-spousal beneficiary within 10 years of the original IRA owner’s death. This means that the beneficiary will have to deal with the tax consequences of the withdrawal much sooner.
One thing to note: this proposal would generally not apply to a spousal beneficiary, or a non-spousal beneficiary that is less than 10 years younger than the IRA owner.
The future of the SECURE Act is uncertain right now because our Senators are quibbling over other (non-retirement-related) features of the bill. Most political experts think the bill will eventually be passed. But, as we are facing another election season, it may take longer than expected.
Wondering how the SECURE Act might affect your retirement plans? While nothing’s been set in stone yet, it never hurts to have a good financial plan in place that can easily be updated if regulations and laws change. Get started today by requesting a complimentary conversation with one of our financial advisors!