Although it hardly made headlines, the U.S. House of Representatives almost unanimously passed a new set of retirement laws just before the Memorial Day weekend. The new act is called the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act. The bill will now move to the Senate where a committee will release and vote on their version of the retirement act before reconciliation and final approval by the President. Differences between the House and Senate versions of the bill will still need to be resolved. However, here are some highlights, as the bill stands currently.
Raising the RMD Age
Under the SECURE Act, the RMD age would move from age 70 ½ to age 72. This means retirees would not be forced to starting taking mandatory withdrawals until later in their retirement, possibly allowing more time for their retirement savings to grow, tax-deferred. It is believed the Senate version of the bill would push the RMD out even further, to age 75 by 2030. It’s estimated that the delay in withdrawals could cost the Treasury $8.9 billion over a 10-year budget window.[i]
Another, unforeseen byproduct is the delayed RMD may reduce charitable gifting to non-profit organizations. Due to the Tax Cuts and Jobs Act, the standard deduction has increased and many itemized deductions have been eliminated, making Qualified Charitable Distributions (QCDs), or direct gifts from an IRA to a non-profit, tax-free, one of the few remaining ways to get a tax-break. If the RMD age is pushed back, QCDs may also be delayed.
IRA Contributions past age 70 ½
The SECURE Act also allows older workers to continue making IRA contributions past the current cut-off age of 70 ½. These days, many people are working longer or starting passion projects in retirement. The new tax rules will allow this group of working Americans to continue saving while staying active.
Small Business Incentives
The SECURE Act would make it easier for small businesses to consolidate resources and offer multi-employer 401k plans to employees. By allowing employers to share costs associated with administering benefit programs, more small business employers are likely to offer retirement benefits to their employees. The act also requires businesses to let long-term, part-time workers become eligible for retirement benefits so they too, may save for retirement. Additionally, there is a proposed $5,500 tax credit to small business employers who automatically enroll their employees in retirement savings plans (versus allowing employees to opt-in to savings plans). By eliminating the hurdle of enrollment, the propensity to save will increase.
The bill encourages retirement planning to be integrated into the traditional savings process by asking retirement plan sponsors to estimate how much income a retiree’s current savings might generate in future retirement income. There are no plans on how to provide such support currently, as it would require the integration of delicate cash flow projections based on social security benefit assumptions, inflation estimates, investment return projections, etc., but the value of earlier financial planning is noted as crucial for a successful retirement.
Penalty-Free IRA Withdrawals for New Parents
New parents will be allowed to take a $5,000 withdraw from a qualified retirement account within a year after the birth or adoption of a child, penalty-free. The provision would allow parents to recontribute the $5,000 back into the plan in the future.
Depleted Inherited IRA
Most of the proposed provisions are great for the American public, but also hurt the wallet of the Federal government. It is believed that the proposed Inherited IRA changes will make up for much of the lost funding. Currently, if a parent passes away, their unused IRA could go to their child (or any non-spouse beneficiary) in the form of an Inherited IRA. Through the Inherited IRA, the child would continue to benefit from tax-deferred growth, and would only be subject to small annual distribution requirements. This has been a powerful estate planning tool, especially when the tax-benefit is stretched over two or more generations. Under the SECURE Act, Inherited IRAs will no longer have the benefit of indefinite life. Instead, Inherited IRAs will be required to be depleted within 10 years of the date of gift. This increases the tax-collection profits of the IRS, as IRA withdrawals are taxed as ordinary income (State and Federal) to the recipient in the year of distribution. The Senate Bill is proposing a five-year payout timeline for IRAs above $400,000[ii].
These days, bipartisan agreement on anything from immigration reform to releasing the unredacted Mueller Report is inconceivable, at best. For this reason, the most refreshing part of the retirement act is the bipartisan support (passed by a 417-3 vote) to improve the way Americans prepare for a financially secure retirement. Hopefully, in a time of division, small steps of unity will remind us to work together for the common good of all. Remember to reach out to your financial planner to ensure you’re integrating opportunities to strengthen your retirement plan once the final bill is approved.