The Secure Act

Recently the U.S. House of Representatives passed a bipartisan bill aimed at modernizing and promoting retirement savings. There hasn’t been a major update to the retirement landscape since the Pension Protection Act of 2006, so meaningful movement here is overdue. Known as the “Secure Act”, the legislation passed the House in late-May but has stalled in the Senate.

Some of the details have started to bubble up to major media outlets and several of you have asked about it, so let’s have an update, shall we?

Even in a bitterly divided Congress it’s still possible to get something done. Or at least done halfway. The Secure Act passed 417-3 in the House and was apparently getting fast-tracked through the Senate and to President Trump’s desk for signature when it was held up by two senators. The issues causing delay, apparently, have to do with expansions to how 529 plan dollars could be used by parents to fund homeschool and religious schooling. These are political hot buttons for some and worthy of holding up otherwise popular legislation. Others have wondered why political issues with education savings accounts should impede legislation aimed at retirement accounts, but that’s Washington, right? 

Here’s a review of the “major” would-be changes –

The age for starting required minimum distributions (RMD) would be moved from 70.5 to 72. This would let retirement money accumulate a little more and adjusts for longer life expectancies since the 1960’s when the current law was written. 

IRA contributions would be allowed to continue past age 70.5 for the same reason. Folks are living longer, and many are still working well past 70. It doesn’t make sense to disincentivize continued retirement savings for those not yet retired.

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No more stretching. For those inheriting IRAs from someone other than a spouse, you’d need to liquidate the account within 10 years following the account owner’s death. Currently, it’s five years or the beneficiary can take distributions based on their own life expectancy. The latter option lets the beneficiary “stretch” the balance for as long as possible, perhaps into the next generation. This goes away under the House bill, likely to help fund it (faster distribution rates mean taxes are paid sooner). Spouses will still get to treat IRA balances inherited from their spouse as their own, so that doesn’t change. 

Increased penalties. Currently, the penalty for failing to take an RMD each year is 50% of the amount you were supposed to take. This would go up to 100% of the RMD amount in some cases. Ouch. 

New parents could withdraw up to $5,000 per year penalty-free from their retirement accounts to cover birth or adoption expenses. 

Small business owners will get multiple incentives for starting up retirement plans. There would be tax credits for both plan start-up and for setting up automatic enrollment. Part-time employees would be eligible too. But there would be stiff penalties for businesses not filing the proper paperwork, which makes sense as a carrot-and-stick approach.

Annuity contracts within workplace retirement plans are said to be incentivized in the bill. This is disconcerting. These contracts are often thought to be a panacea for retirement income security. Instead, they’re often high-cost poor-performing investments that suck resources from the uninformed (just my opinion, of course). 

529 plan distributions could be used for repayment of student loans (up to $10,000 a year – makes sense to me, anything to help alleviate the problem...). And there’s the aforementioned 529 cash for private, religious and homeschools. The details are unclear, but it’s possible that this latter portion could be stripped from the final bill to ensure passage by the Senate. You may recall that something similar happened at the last minute during the passage of the recent tax overhaul as well.

It’s my understanding that the Secure Act could become law later this year, or even this summer. We’ll see what Congress does with the final details since some of the above directly contradicts a plan previously authored by the Senate. 

Ultimately, the changes being proposed will have direct implications for your long-term plans whether you’re an individual or a small business owner. I’ll keep you informed as I learn more in the coming weeks.  

Have questions? Ask me. I can help.

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