The SECURE Act of 2019

It’s Called the Setting Every Community Up for Retirement Enhancement or the SECURE Act of 2019

Let’s take a look at the Setting Every Community Up for Retirement Enhancement, also known as the Secure Act of 2019.

Good Points – Depending on your individual situation

• More time in IRAs and 401(k)s. The bill would push back the age for required minimum distributions (RMDs) from 70½ to 72 years old. With 65,000 baby boomers retiring daily, those who would rather not take their RMD’s and not have them taxed and defer the distribution for two years this is a good feature. Moreover, the fund could continue to grow tax-free.
• Grant part-time workers benefits. Long-term part-time employees would be able to participate in their company’s 401(k) plans.
• Boost small-business 401(k)s. Small businesses could band together in group plans.
• Annuity adoptions. Would allow employer-sponsored 401(k) plans to add annuities as investment options on the menu. This feature is favored by insurance companies as providing annuities is a big market.
• 529 plans. 529 plans would be expanded to pay for expenses related to an apprenticeship or to pay back as much as $10,000 in student loans.

Bad Points – depending on your individual situation

• Age limits

Investors with 401(k) plans or other tax-deferred accounts would have another year and a half before Uncle Sam required withdrawals. Instead of taking money out at 70½, Americans would be able to wait until they turned 72. It gives extra time to grow your investments before you have to start taking money out of your accounts yet take the funds out at a later date would actuarially require larger starting distributions as the time frame for taking the would be less.

To make up for lost tax revenue, the House bill would require Americans who inherit an IRA to withdraw the money within 10 years of the account owner’s death, along with paying any taxes due. Notwithstanding, the surviving spouses and minor children would be excluded. Under current law, heirs spend down inherited IRA accounts over their lifetime, an estate-planning strategy known as the “stretch IRA.” The SECURE Act would do away with the stretch IRA. This is a big change and subjects the inherited IRA to income tax at a faster rate. Apparently, this was a tradeoff from a revenue perspective to allow a delay in the RMD’s.

Moreover, from an estate planning perspective the elimination of the stretch IRA will change the thinking of whether it is better to withdraw the IRA and have it taxed at the (presumably) owner’s lower tax rate and pass on the net to his heirs or maintain the fund, defer, and allow the fund to continue to grow. This will be a new issue for estate planners to consider.

The Senate version, known as RESA, is slightly less punitive and may instead call for a five-year payout period for inherited IRAs over $400,000 per heir.

• Other Points

The bill would require your employer’s 401(k)-type retirement plan to allow “permanent” part-time workers to participate. To qualify, you would need to have worked 500 or more hours a year (but fewer than 1,000 hours) for at least three consecutive years. There are 2,080 hours in the traditional 40-hour-a-week year.

• 401(k) options for small businesses

If House and Senate bills pass and become law, small businesses could have the option to join group plans alongside other companies. This lowers administration and management costs and ideally makes higher-quality plans available to small businesses and their workers.

Current law allows small businesses starting a new retirement plan a $500 tax credit. The SECURE Act bill would increase the credit to as much as $5,000 and apply for three years.

• Annuity options, good and bad

The bill would allow 401(k) plans to add annuities as an option for employees.

The idea is that annuities solve the problem of lifetime income for workers who once received pensions. Annuities are insurance policies that convert retirement savings into income. Common in pension plans, annuities to date have not been popular in 401(k) plans.

Annuities have downsides, fees are often high.

The House bill would repeal the so-called kiddie tax changes beginning in 2019, although taxpayers could elect to use the old tax rules for 2018 if they wish. This would be a welcome change for those who were surprised by increases in tax under the new tax rules, which subjected those children to the trust tax rates and brackets rather than using their parents’ brackets. This is especially true for college students who received taxable scholarships and `Gold Star’ families, those who are collecting military survivor benefits after losing a parent.

A final positive: The SECURE Act would allow investors early access to IRA funds for any “qualified birth or adoption” by creating a new exception to the 10 percent penalty.

Everyone whether beginning to save for retirement, about to retire, or in retirement needs to periodically examine their retirement account to ensure it comports with their current needs.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Frank Brunetti, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.