Take a look at the SECURE Act of 2019
If you believe that Congress is trapped in a morass of partisan bickering, take a look at the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act of 2019). It cleared the House Ways and Means Committee on April 2 with a unanimous vote. Since then, it has been garnering energetic support from both parties. A final vote in the House is expected as early as today.
Although the bill’s full name is a mouthful, the idea behind it is almost as compelling as motherhood and apple pie. After all, who doesn’t want to be secure in retirement? Little wonder the SECURE Act is getting such broad support.
The SECURE Act seeks to improve on the current retirement savings regime in three ways. First, it will make it easier for small companies to establish retirement plans. Second, it will make it easier for individuals to participate in those plans and preserve their savings. Third, it will ease some of the administrative barriers that plan sponsors currently face. Here are some of the highlights.
Establishing and administering a retirement plan can be expensive for small companies. Retirement plans are heavily regulated to ensure fairness and viability. Setting up a new plan costs thousands of dollars and can be fraught with compliance problems if not done correctly. The SECURE Act addresses some of these problems by providing increased tax credits for companies that start new plans. It also simplifies some of the compliance burden by providing enhanced safe harbor rules.
The SECURE Act will allow part-time workers to participate in employer-sponsored retirement plans. Current law allows employers to exclude employees who work less than 1,000 hours per year. The SECURE Act would require plan sponsors to have a dual eligibility requirement. An employee would need to complete at least one year of service with the 1,000-hour rule, or three consecutive years of service with at least 500 hours of service.
Older retirees would also have some relief. Currently, IRA holders and retirement plan participants must begin taking required minimum distributions at the age of 70 ½. The SECURE Act would increase the RMD age to 72. In addition, current law prohibits individuals older than 70 ½ from contributing to a traditional IRA. The new law would eliminate 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.
These enhanced benefits come at a cost, so the SECURE Act also contains some revenue provisions. Perhaps the most onerous is the proposed elimination of the stretch IRA rule for inherited IRAs. Instead of the 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.
A key problem with the proposed change to inherited IRA distributions is that most of the distributions under the 10-year rule would likely happen during the beneficiaries’ peak earning years. Obviously, the U.S. Treasury would like that. However, if the SECURE Act becomes law, many people will want to revisit their estate plans.
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.