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Retirement Planning
Jun 18, 2019 Moe Allain, RMA®, CPWA®, MBA

Big Changes Coming with Retirement Accounts?

Social Security


 

Three important pieces of retirement legislation are currently in the works, and as a retiree or pre-retiree, this may be important to you.

The first important piece of legislation, referred to as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was passed by the House of Representatives Ways and Means Committee on May 23, 2019 in an overwhelming 417-3 vote. The SECURE Act is the biggest retirement-oriented piece of legislation to pass since the Pension Protection Act (PPA) of 2006.

The Senate has not yet passed the SECURE Act and has their own similar version of the bill, referred to as the Retirement Enhancement and Savings Act (RESA) of 2019, which was introduced February 6, 2019. The Portman-Cardin Retirement Security & Savings Act (RESA) was introduced the week of May 13, 2019.

At a high level, the most significant proposed changes occur in (1) IRA rules and (2) efforts to get smaller businesses to offer workplace retirement savings plans.        Here are summaries of the SECURE, RESA and RSSA retirement acts:

SECURE Act

    • Increases Required Minimum Distribution (RMD) age from 70 ½ to 72.
    • Eliminates prohibition on Traditional IRA contributions for those age 70 ½.
    • In most non-spousal instances an inherited IRA would have to be fully distributed within 10 years of the owner’s death.
    • Makes is easier for employers to band together to form multi-employer retirement plans to reduce costs and improve plan quality.
    • Allows employers to increase the automatic 401(k) plan contribution amount from 10% to 15% of employee pay.
    • Allows small businesses a tax credit of up to $500 to help pay for the cost of establishing and maintaining retirement plans for employees.
    • Makes long-term part-time workers able to contribute to employer retirement plans.
    • Makes it easier for employer workplace retirement plans to offer select annuities to retiring employees in 401(k), 401(a), 403(b) and 457(b) plans by creating a safe harbor.

RESA

    • Increases RMD age from 70 ½ to 75.
    • In most non-spousal instances an inherited IRA would have to be fully distributed within 5 years of the owner’s death for account balances greater than or equal to $450,000.

Portman-Cordin RSSA

    • Gradually increases RMD age to 75 by the year 2030.
    • Phases in the RMD age over several years and updates the mortality tables to reflect longer life expectancies.
    • Allows participants with Roth accounts in 457(b), 401(k), 401(a) and 403(b) plans to roll Roth assets into these plans.
    • Permits Qualified Charitable Distributions (QCDs) from 401(k), 401(a), 457(b) and 403(b) plans, and not just from IRAs.
    • Provides employer matching contributions to retirement accounts for student loan holders as if student loan repayments were considered salary contributions.

According to Forbes (May 24, 2019, Ashlea Ebeling, Forbes Staff), “the crackdown on ‘Stretch IRAs’ by this legislation requiring non-spousal inherited IRAs to be depleted in <= 10 years will pay for virtually all other items contained in the legislation.” 1

As the SECURE Act has been worked on for three years by both parties, it is generally believed by many that the bill will make it through the Senate Finance Committee.

Paul Richman, Insured Retirement Institute (IRI) chief government and political affairs officer, says “passage of a comprehensive security measure this year is now within reach and it’s likely before the end of this year, there will be a retirement bill that gets sent to the president’s desk.”

1According to Investopedia (updated Feb 27, 2018), a “Stretch IRA” is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. It allows for continued tax-deferred growth of an Individual Retirement Account (IRA). By using this strategy, the IRA can be passed down from generation to generation while beneficiaries enjoy tax-deferred and/or tax-free growth. The term “stretch” does not represent a specific type of IRA; rather it is a financial strategy that allows people to stretch out the life – and therefore the tax advantages – of an IRA.

While Baird does not offer tax or legal advice, our Financial Advisors routinely work with clients’ attorneys and tax professionals to ensure that all phases of the wealth management process are properly addressed.

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