Concerns about the SECURE Act of 2019
Last May, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE Act, by a remarkable 417-3 majority. Despite its horribly awkward name, that kind of bipartisan support in the House automatically qualifies this bill as pure political gold. But if that’s the case, why has it been hung up in the Senate for the past five months?
Most of the opposition arises out of the bill’s revenue provisions, the most onerous of which is the elimination of the stretch provision for inherited IRAs. Instead of a beneficiary being able to stretch distributions from her inherited IRA over her remaining lifetime, the new law would require that all inherited IRAs be distributed by the end of the tenth year following the death of the IRA creator. The exceptions to the 10-year rule are spouses, beneficiaries who are disabled or chronically ill, and minor children. Once a minor child beneficiary reaches the age of majority, however, the 10-year clock would start ticking.
Opponents see this bill as opening the door to changes that will erode the value of all types of IRAs. In response, a few key senators have put holds on this legislation and Senate Majority Leader Mitch McConnell (R-KY) says he will not bring the bill to the floor unless and until these holds are lifted. Although this stalemate is frustrating to the bill’s many supporters, there may be something to the senators’ concern.
A recent article in the Wall Street Journal tells of Joseph Folk, a 72-year-old resident of Norfolk, Va. Throughout his career, Mr. Folk was a relentless saver and a careful investor. When he retired as a mid-level railroad executive, his retirement accounts were worth several million dollars. After providing for his wife and children, his plan is to pass his IRAs on to his four grandchildren with the intent that they will be able to stretch the tax advantages over their lifetime. The SECURE Act’s ten-year rule will significantly reduce the long-term benefit of his gift to his grandchildren. This retroactive change in rules, Mr. Folk says, is a betrayal of promises made to him during his lifetime of savings.
Perhaps you and I should be concerned, too. By making such a significant retroactive change, Congress may be setting a precedent for other retroactive changes in the future. Could Roth IRAs be made taxable at certain income levels? Could the stretch for spousal IRA beneficiaries be limited? What other retroactive changes might Congress impose? These questions should give all of us pause.
As a quick refresher, the stated goal of the SECURE Act is to “encourage retirement savings, and other purposes.” It seeks to do this in two ways. First, it will make it easier for small companies to establish retirement plans. Setting up a new plan can be expensive. The SECURE Act offsets some of the expense by providing tax credits for companies that start new plans. It also simplifies some of the compliance burden by providing enhanced safe harbor rules.
Second, the Secure Act will make it easier for individuals to participate in those plans. Part-time workers will be eligible after at least one year of employment with 1,000 hours of service or three consecutive years of employment with at least 500 hours of service.
The SECURE Act will also increase the RMD age from 70 ½ to 72. In addition, current law prohibits individuals older than 70 ½ from contributing to a traditional IRA. The new law eliminates that prohibition.
Younger workers will also find something in the SECURE Act. Currently, money put in a retirement plan can only be accessed penalty-free prior to age 59 ½ for a first-time home purchase, and some education and medical expenses. The new law would allow penalty-free withdrawals in the year following a birth or adoption. In addition, qualified birth or adoption distributions can be paid back into the plan or an IRA at a future date.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.