The House passed the SECURE Act before Memorial Day weekend, with a 417-3 vote, moving the fate of the biggest changes to retirement policy since 2006 to the Senate which plans to take up its version of the bill after the holiday. There’s good news for part-timers, new parents, older workers and employees at small companies that don’t offer workplace retirement plans. To pay for it all, there’s bad news for the rich: a crackdown on a favorite wealth transfer strategy: the stretch IRA.
“This changes everything; it’s a massive shift in the paradigm,” CPA Robert Keebler said in a recorded alert via the Ultimate Estate Planner about the potential IRA changes.
Here’s a look at the SECURE Act, with notes on how it differs from the lead Senate bill, RESA, and another retirement bill introduced last week by senators Rob Portman and Ben Cardin that has a 50-plus retirement wish-list, including a fix to the Saver’s Credit. There’s a lot of hashing out to do.
The front-runner SECURE Act would:
Increase tax incentives for small employers to offer retirement plans. The bill increases the tax credit for new plans from the current cap of $500 to $5,000, or $5,500 for plans that automatically enroll workers. Rule changes will make multi-employer retirement plans, where two or more employers band together to offer a plan, more workable. Bottom line: Small employers would be more likely to offer 401(k) retirement plans.
Allow part-time workers to participate in 401(k) plans. 401(k) plans typically require employees to work 1,000 hours in a 12-month period to participate in the plan. The new threshold would be 500 hours for three consecutive years. Note: This isn’t mandatory, so it’s in the employers’ court, and it wouldn’t be effective until January 1, 2021.
Change age 70 ½ RMD rule to 72. Instead of having to take out annual required minimum distributions from your 401(k) and IRA starting when you turn 70 ½, the minimum age would be delayed until 72. This would be a boon to most taxpayers who can delay taking money out (it’s estimated it will cost the Treasury $8.9 billion over the 10-year budget window). But it adds complexity—and potential taxpayer mistakes—for workers who have defined benefit plans and those who make IRA charitable rollovers (QCDs) as 70 ½ remains the magic age for those provisions. To add to the discussion, the Portman-Cardin bill raises the RMD age to 75 by 2030.
Eliminate prohibition on traditional IRA contributions for those age 70 ½. Older workers would be able to keep saving in a traditional IRA.
Require Inherited IRAs to be depleted within 10 years. This is the provision that will pay for virtually everything else—bringing in an estimated $15.7 billion to the Treasury over 10 years. It will upend estate planning. Today IRAs can be stretched out over beneficiaries’ lifetimes, providing decades of tax-deferred (or tax-free in the case of Roth IRAs) compounding. Instead, under the SECURE Act, most IRA beneficiaries (not a spouse) would be required to deplete an inherited IRA within 10 years, accelerating —and likely increasing— taxes owed, and destroying creditor protection for IRAs held in trust. Anyone with an IRA payable to a trust will have to rethink their plan, Keebler says. Forbes contributor Leon LaBrecque explains how the 10-year rule could cost your kids here.
This provision will have to be reconciled with the Senate’s proposal of a 5-year payout requirement for IRAs above $450,000. But be forewarned, the end of the stretch IRA is in sight.
Allow penalty-free withdrawals from retirement plans for new parents. Within a year after a birth or adoption, new parents could take up to $5,000 from a 401(k) or IRA or other qualified retirement plan. It’s dangerous to use your retirement plan as a piggy bank, but the bill does have a provision that would allow parents to recontribute the $5,000 indefinitely.
Open the door for annuities. Few employers embed annuities in their workplace plans now, but provisions in the SECURE Act encourage their use. Employers who select annuity providers would be protected from lawsuits, and workers would be able to move annuities from one workplace plan to another. Workers will have to watch out for risks and costs.