We were razor-thin close to the most sweeping, positive changes to retirement plan rules in 13 years,
but we’ll all just have to wait.
In surprising bi-partisan fashion, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019. Now it’s up to the Senators to decide what happens next. The full measure would go a long way to helping retirees plan for a lifetime of income.
With Congress on recess, hopefully Senators will swipe through the 125-pages of required summer reading and return to the hill with a proud-and-loud approval in September.
In the meantime, here’s the gist of what the Secure Act offers in its current form.
More Annuities for More Income
By and large, The Secure Act of 2019 would encourage employers to offer annuities as an option to plan participants starting at retirement.
Annuities1 are available through insurance companies and can provide you with guaranteed income for life. Putting them on the plan menu would be a small-but-mighty change for so many Americans. Fewer employers currently offer such guaranteed income products (fewer than 10% of 401(k) plans offer an annuity option, according to a 2017 survey by the Plan Sponsor Council of America). As many Americans may not know, Social Security only replaces about 40% of the average worker’s income. Clearly, most of us need more help ensuring a meaningful lifetime income stream. The Secure Act would make it all the easier to convert our savings to exactly that.
More Access to More People
The Secure Act also would incentivize employers that are otherwise challenged to sponsor or administer a single plan to band together and offer 401(k) plans to their combined employee base. It also would allow long-term part-time employees who work at least 500 hours a year to participate in this retirement plan. Both provisions would significantly broaden the reach of retirement plans2 across the country.
More Reasons to Keep Saving
Other benefits are on the savings end of the retirement planning equation. First, the new rules would repeal the age cap for contributing to IRAs, which is currently 70 ½. It would also up the age at which you must start drawing down your qualified plan assets ─ known as Required Minimum Distributions ─ from 70 ½ to 72. These more liberal rules not only help put off additional income taxes a little further, they’re a smart way to better accommodate the fact we’re living longer, healthier lives.
More Access with Less Pain
The bill doesn’t overlook that stuff happens, and we may need to get at our hard-earned savings sooner than later. That said, it allows up to $10,000 in withdrawals from 529 college savings plans2 if the money goes to pay student loans. Plus, if you have a baby or adopt a child, you can take up to $5,000 ─ penalty free ─ up to a year afterward.
Headwinds from Head Games
Opponents argue that the bill’s price tag is placed totally on the shoulders of heirs to retirement accounts. Indeed, it stipulates that those who inherit tax-advantaged accounts would have to withdraw all the money in a shorter timeframe than currently allowed ─ depleting their inheritance within 10 years ─ and paying all the taxes on it sooner. Currently, such heirs can “stretch” the withdrawals over their lifetimes, allowing them to spread the tax burden.
With the elimination of the stretch IRA Congress expects to collect $15.7 billion in taxes. “However, savvy IRA owners may elect to convert their taxable asset into a non-taxable asset by doing a Roth IRA conversion3 or by taking money from their IRA account and purchasing life insurance thus removing the tax burden from their heirs and leaving them a tax-free inheritance,”4 commented Ena Anthony, Senior Advanced Markets Associate at National Life. “In effect, this bill might push people to do better, more tax-efficient planning and if that happens it would put Congress’s revenue projection in jeopardy.”
That said, the impact of eliminating the stretch IRA could be limited. Certainly, the new rules may pinch a bit for those who have inherited IRA money. But surviving spouses and heirs with qualified disabilities or chronic illnesses would be exempt.
As the Senate ponders the bill’s fate, hopefully members will be on the receiving end of good advice offering a true sense of where Americans are right now: in major need. We’re still not saving as much as we should, and as lifespans grow we need whatever we can sock away to last longer. Therefore, any tool or trade our elected leaders can bestow to secure our future is not only appreciated, it’s patriotic.
Read more about The Secure Act of 2019.
1 Because they are meant for long-term accumulation, most annuities have withdrawal charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. In addition, withdrawals prior to age 59 ½ may be subject to a 10% Federal Tax Penalty.
2 A 529 Plan is a plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible.
529 Plans are subject to investment risk and do not guarantee that you will accumulate enough money to cover college expenses.
By investing in a plan outside your state of residence, you may lose available state tax benefits. 529 Plans are subject to enrollment, maintenance, and administration/management fees and expenses. Make sure you understand your state tax laws to get the most from your plan.
Tax-free withdrawals apply to qualified educational expenses only. If you make a withdrawal for any other reason, the earnings portion of the withdrawal will be subject to both state and federal income tax and possibly a 10% federal tax penalty.
An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s official statement. The official statement should be read carefully before investing.
3 Taxes must be paid on the IRA at time of conversion. Please refer to IRS.gov for details.
4 The death benefit of life insurance is generally received tax-free by the beneficiaries per Internal Revenue Code § 101(a)(1). There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.
Securities and investment advisory services are offered solely through registered representatives and investment adviser representatives of Equity Services, Inc. (ESI), Member FINRA/SIPC, One National Life Drive, Montpelier, VT 05604. (800) 344-7437.
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