The House has passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act. It’s now up to the Senate to consider the bill, which has been called (probably with some hyperbole) one of the most significant pieces of retirement legislation to be proposed in over a decade.
If this proposal does become law, we’ll bring you more complete details – including an analysis of how it will affect you – as soon as they’re available.
Here’s a summary of the main provisions:
Delayed RMDs. Currently, retirement account holders must commence Required Minimum Distributions (RMDs) at age 70½. The SECURE Act would delay mandatory distributions until age 72. If you need to take withdrawals to cover your retirement expenses, the new rules won’t change anything. If, however, you have other sources of income to tap, this will help you defer taxes and let your IRA grow for longer.
IRA Contributions After Age 70½. Now, you cannot contribute to your Traditional IRA after age 70½. Under the SECURE Act, you can continue contributing at any age as long as you have earned income. This will help seniors working, even part-time, to save, defer income, and cut taxes well into their seventies.
There are other provisions that provide greater access to 401(k) plans for part-time workers, flexibility in making retirement plan withdrawals to cover expenses of adoption or childbirth, and limited 529 withdrawals to repay loans and fund apprenticeships.
But it’s not all good ….
How does the SECURE Act propose to pay for these enhancements?
In essence, it robs Peter to pay Paul.
The SECURE Act would take away the very popular and powerful “stretch” IRA provision. This is the ability under current law to leave funds in your IRA or other retirement plan to your children or other non-spouse beneficiaries, who can “stretch” withdrawals over their life expectancy. Withdrawals are still fully taxable, but your heirs can reduce the full impact of the tax bill by “stretching” it over an extended time period.
The SECURE Act would force non-spouse IRA beneficiaries to withdraw inherited IRA funds within 10 years instead of over their lifetime. In some cases, especially when there is a larger inherited 401(k) or IRA account, this could mean extremely large tax bills and rapid depletion of funds.
It makes it a lot less appealing to save and leave a legacy for the next generation. And while it favors married couples, it harms singles and unmarried couples, who form an ever growing portion of our society.
The bottom line? It makes it harder to pass wealth to children and grandchildren, and means much bigger tax bills for heirs. I have no doubt that, overall, the SECURE Act provisions will hurt our clients, especially those who do the bulk of their saving in a retirement account, and discourage long-term saving.
There is indeed a retirement crisis in this country. People do not save enough.
While permitting IRA contributions at any age is a good idea (it encourages saving), raising the mandatory withdrawal age by 18 months seems largely ineffective. It will only help wealthier individuals who don’t need to take IRA withdrawals to make ends meet. People who are less prepared for retirement are often the ones forced to take out IRA funds before 70½ – they just need the money. The new legislation will do nothing to help them.
There are other and better ways to incentivize saving for retirement. The main impact of this legislation will be to penalize people who do save and want to leave money for their heirs. That’s unfortunate. The more they save, the less stress they’ll put on overburdened entitlement programs.
My two cents, from where I sit and work with “real” Americans on their retirement and financial plans 24/7, retirement legislation should encourage people to save and be financially independent. It shouldn’t penalize the people who do save by increasing the tax burden on their family and heirs. That’s why, for me, the SECURE Act is a colossal fail.