If you follow national news, you may have heard of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Although yet to clear the Senate, the proposed legislation has seen broad, bipartisan support in the House of Representatives.
The SECURE Act could make individual retirement accounts (IRAs) a more attractive component of retirement strategies and create a path for annuities to be offered in retirement plans, which, in turn, could provide a lifetime income stream for retirees. It would also change the withdrawal rules on inherited “stretch” IRAs, which may impact retirement and estate strategies. There are a significant number of additional proposed changes, one of which, for example, would allow long-term part-time workers to qualify for and participate in employer-sponsored 401(k) plans. Another would expand the options for using Section 529 plan dollars (including student loan repayment).
All that said, the Act warrants closer examination, to gain a more fulsome understanding.
Currently, traditional IRA owners must take required minimum distributions (RMDs) from their accounts after age 70½. Upon reaching that age, these individuals are also restricted from making any contributions to their IRA accounts. However, if the SECURE Act passes the Senate and is signed into law, RMDs from a traditional IRA would not be mandated until age 72. The Act would also allow people of any age to contribute to traditional IRAs, provided they continue to earn income. This combination of changes means you could take an RMD from your traditional IRA and contribute to it in the same year after reaching age 70½.
The Act would also effectively close the door on “stretch” (i.e., beneficiary) IRAs. Currently, non-spouse beneficiaries of IRAs and retirement plans may elect to stretch the required withdrawals from an inherited IRA or retirement plan – that is, instead of withdrawing the whole account balance at once, they can take gradual withdrawals over a period of time, or even their entire lifetime. This strategy may help them manage the taxes linked to the inherited assets. If the SECURE Act becomes law, it would set a 10-year deadline for such asset distributions.
Under current law, employers generally may exclude part-time employees (i.e., those who work fewer than 1,000 hours per year) when providing a defined contribution plan to their employees. Women are more likely than men to work part-time, and these rules can be quite harmful as they begin preparing for retirement. Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) plan to have a dual-eligibility requirement, under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule) or three consecutive years of service in which the employee has completed at least 500 hours.
Expansion of Section 529 Plans
The legislation expands Section 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.
The SECURE Act has now reached the Senate, meaning that it could move into committee for debate, or it could end up attached to the next budget bill. Regardless, if it becomes law, the SECURE Act could change the retirement goals of many, making this a great time to talk to a financial professional.