Major Changes to 401(k)s and IRAs Likely on the Way
H.R. 1994, the “Setting Every Community Up for Retirement Act of 2019” or the SECURE Act modifies the requirements for employer-provided retirements plans, individual retirement accounts (IRAs), and other tax-favored savings accounts. As you can imagine with any piece of legislation dealing with tax issues, it is extremely complex and confusing.
A few of the key provisions dealing with potential changes to your 401(k):
- Broader access to 401(k)s to include part-time workers. The legislation states that anyone working over 500 hours a year could be eligible for a 401(k) after three years of service. Additionally, makes it easier for small businesses to offer 401(k) plans for their employees by providing tax credits.
- Amend the Required Minimum Distributions (RMDs) age from 70½ to 72 years of age. This change was likely included to account for the fact that people are living longer and retiring later in life and allowing these individuals to continue to contribute an additional year and half.
- Allows higher caps on automatic 401(k) contributions. Current rules allow for 10% of salary to be automatically stepped up over time, the bill would increase that to 15%.
- Eliminates penalties for withdrawing money from your 401(k) up to $5,000 after the birth or adoption of a child.
In terms of IRAs, there is a lot of angst amongst businesses about the proposed changes, specifically around “stretch IRAs”. A stretch IRA is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a beneficiary. It allows for continued tax-deferred growth for an IRA potentially over several generations.
The SECURE Act makes significant changes to the rules surrounding the stretch IRA strategies that could potentially eliminate 1/3 of the IRAs in the next few years. Specifically, the SECURE Act amends the stretch period to 10 years (the Senate bill allows a stretch on the first $400,000 and the balance must be distributed within five years).
An individual who inherits an IRA would have to pay tax on the entire IRA as it is taken out, the account must be distributed within 10 years and it will significantly reduce the amount of potentially earned through investment.
These potential changes will absolutely change the way that individuals plan for retirement and their children. Individuals might investigate establishing a revocable living trust and a new demand for life insurance policies that would provide tax-free benefits. No surprise here, but the largest lobbying group behind the legislation is insurance companies.
On May 23, 2019, the U.S. House of Representatives passed on a roll call vote of 417-3, H.R. 1994, the “Setting Every Community Up for Retirement Enhancement Act of 2019” or the SECURE Act. The Senate has introduced similar legislation S. 972, the Retirement Enhancement and Savings Act of 2019. It appears the current strategy is for the Senate to pass the SECURE Act with possible amendments that were included in RESA and proceed to a Conference Committee (leadership from both the House and the Senate) to agree on the differences and send to President Trump to become law.
TIA’s Operations Committee is examining these issues and providing feedback to TIA staff. Please let us know what the potential impact to your business might be. Contact firstname.lastname@example.org or 703.299.5700 with your feedback.