Proposed bill represents landmark changes to retirement savings

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 07/30/19

Proposed bill represents landmark changes to retirement savings

The Senate is considering legislation that represents the most comprehensive changes to the retirement system since the passage of the Pension Protection Act in 2006.

The SECURE Act (Setting Every Community Up for Retirement Enhancement) could change the way that individuals save for retirement and provide access to workplace retirement savings plans for millions of workers who currently do not have a plan.

The House passed the SECURE Act on May 23 by a margin of 417 to 3. Currently, the SECURE Act is being considered in the Senate. The House bill is very similar to a companion bill in the Senate known as RESA (Retirement Enhancement Savings Act), which previously passed the Senate Finance Committee.

Proponents hoped the bill could pass the Senate under "unanimous consent." This procedure would allow the Senate to bypass the process of reconciling the House (SECURE) and Senate (RESA) bills, and instead pass the House bill as is.

However, several senators have not provided consent for that process. One of the contentious issues for certain senators was the removal of a provision that would have defined certain homeschool expenses as qualified expenses for 529 accounts.

Last week, the bill was removed from a vote on a budget agreement. It is now likely that the bill will be taken up in the fall. At that time, it could be linked to other legislative action, such as efforts to extend certain expiring tax provisions.

Here are some key provisions of the SECURE Act:

Auto-escalation rate
Increases the amount that retirement plans can "auto-escalate" participant contributions to 15% from 10%
Access to annuities
Improves access to guaranteed retirement income options within retirement plans by easing regulations on plan sponsors
Increased tax credits
Adds tax credits for smaller employers to establish retirement plans for employees and to implement auto-enrollment. Creates a new tax credit of up to $500 per year to defray start-up costs for plans with automatic enrollment.
Expanded access
Allows certain long-term part-time employees to participate in retirement plans. Currently, employees who work less than 1,000 hours per year can be excluded. Part-time workers who work at least 500 hours for three consecutive years would be allowed to participate.
Multiple employer plans
Eases restrictions on groups of employers wishing to "band together" and offer multiple employer plans (MEPs), enabling smaller businesses to gain more scale and cost efficiency
New rule for RMDs
The age for required minimum distributions would be raised from 70½ to 72
Age limit for IRA contributions
Those older than 70½ reporting earned income in their tax returns could contribute to a traditional IRA (currently those over age 70½ can only contribute to a Roth IRA)
Penalty-free withdrawals
Allows penalty-free withdrawals from retirement plans for individuals in the event of the birth of child or adoption
Expanded use of 529
Expands the definition of "qualified expenses" for 529 plans to include qualified apprenticeship programs and repayment of student loans (up to $10,000)
Stretch IRA strategy
The legislation would eliminate the option (referred to as "stretch IRA") for non-spouse beneficiaries to withdraw required minimum amounts annually based on their remaining life expectancy. Instead, inherited retirement savings would need to be withdrawn within 10 years of the death of the account owner. If implemented, the limit on "stretching" required distributions would apply on accounts where the owner passed away as of a certain date. Current non-spouse beneficiaries stretching required distributions would not be impacted.

Bipartisan support may help move the bill

The legislative process is hard to predict. Still, it is important to note that the level of bipartisan support in both chambers of Congress provides a decent chance for this legislation to eventually be signed into law.

Clients should consult with their advisor to stay up to date on any changes potentially impacting their financial plans. For example, if the stretch IRA strategy is repealed, there may be important considerations around legacy plans for transferring assets to heirs.

Putnam CEO Bob Reynolds has expressed his support for the SECURE Act. How do you think this proposed legislation will change the face of retirement?

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