A lot of things come out of Washington D.C. Some bad. Some worse.
Despite the bad, over the course of our country’s vast history, a lot of good has come out of Washington. Even now, there is movement in Congress to pass legislation that is aimed at enhancing retirement in the US.
The Setting Every Community Up For Retirement Enhancement Act of 2019 (SECURE Act) sets forth one of the biggest overhauls to the retirement system in America in the past couple of decades. You can read summary version of the bill here, but bear in mind that this is likely to receive some tweaks as it makes its way through the House and over to the Senate, before landing on President Trump’s desk.
A few highlights that are worth pointing out:
Section 106. Repeal of Maximum Age for Traditional IRA Contributions
Under current law, you are unable to make contributions to your Traditional IRA after you turn 70 ½. The repeal of maximum age would be a welcome gift for those who want to work into their 70s and beyond and continue to put away money.
Section 111. Allowing Long-term Part-time Workers to Participate in 401(k) Plans
This one is pretty simple – it seeks to give more people access to retirement plans. This could also benefit retirees who want to work part-time in retirement or workers scaling back and switching jobs toward the end of their careers.
Section 112. Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption
While this might not impact most of our client base, it will likely impact your children and grandchildren. As I know personally, adoption can run a family $20,000 or more ($50,000 in some cases). While we’d advise looking at other options before tapping a retirement account, it would be nice to know that the option exists.
Section 113. Increase in Age for Required Beginning Date for Mandatory Distributions
I would be surprised if this one made it into the final bill. Under current law, Uncle Sam comes knocking on those tax-deferred accounts when you turn 70 ½. This part of the SECURE Act would push that age up to 72.
Section 302. Expansion of Section 529 Plans
Student loans are one of the biggest debt problems in the US. This part of the bill would allow families to use tax-free 529 funds to pay down student loans. It would also increase the versatility of 529 funds to include qualified K-12 expenses, homeschooling expenses, as well as apprenticeship programs. Many of our clients are funding 529 plans for their grandchildren. This will help ensure that their children have more options in how to use those funds for their children.
Obviously, there’s a little thing you should remember from your high school economics class called “opportunity cost,” meaning these changes will likely come at a cost. One opportunity cost that’s on the table is an overhaul to required minimum distribution rules, specifically upon the death of the IRA owner. This could have an impact on your legacy planning and the ability for your children to utilize a “Stretch IRA” over their lifetime, and potentially the lifetime of their children.
Section 401. Modifications to Required Minimum Distribution Rules
The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority (18 years of age) are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.
Again, these and many other items within this legislative piece could impact your overall retirement planning picture or those of your loved ones. However, this little bill still has a long journey through Capitol Hill and on over to Pennsylvania Avenue. We’ll keep you posted if/when this bill becomes law.