Learn about the changes to IRAs, 401(k)s, RMDs, and more By DANIEL KURT | Read article on Investopedia Updated Jan 20, 2020The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, which originally passed the House in July, was approved by the Senate on Dec.19, 2019, as part of an end-of-year appropriations act and accompanying tax measure, and signed into law on Dec. 20 by President Donald Trump. The far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets. KEY TAKEAWAYS
A Troubled Retirement System That there’s trouble brewing in the U.S. retirement system, which requires most workers to supplement Social Security with personal savings, has been widely acknowledged. According to data from the U.S. Bureau of Labor Statistics published in 2018, only 55% of the adult population even participate in a workplace retirement plan. And even those who do are often woefully behind when it comes to investing part of their paycheck. The wealth management giant Vanguard, for instance, revealed early in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035. The SECURE Act aims to encourage employers who have previously shied away from these plans, which can be expensive and difficult to administer, to start offering them. “With [the] passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Rep. Richard E. Neal (D-Mass.) said in a statement after the bill sailed through the House in May. 417 to 3The margin by which the SECURE Act passed in the U.S. House of Representatives in May 2019. Tangled Up in the Senate Despite the SECURE Act’s overwhelming support in the House, it didn't get through the Senate until it was attached to the appropriations and tax-extender bills that passed the day after President Trump was impeached in the House of Representatives. In early July, PlanAdviser reported that two Republican senators—one of them Ted Cruz (R-Texas)—were holding it up. According to a Washington insider, Cruz was trying to tweak the section on 529 accounts so that parents can use them for home-schooling expenses as well.2 In October, PLANSPONSOR quoted Chris Spence, TIAA’s senior director of government relations, as saying the bill has been sitting "in something like legislative limbo." 3 Along with Cruz, two other senators—Mike Lee and Pat Toomey—had reservations about some technical points. Spence was optimistic and predicted correctly that the route to passage could be through being attached to a broader bill that has to be passed by the end of 2020. Major Provisions of the SECURE Act The SECURE Act tweaks a number of rules related to tax-advantaged retirement accounts. Here's what it will do:
One other key change in the new bill is paying for all this: the removal of a provision known as the stretch IRA, which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional tax revenue. (This will apply only to heirs of account holders who die starting in 2020.) Planners Evaluate These Changes While retirement planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Md., cautions that the bill is far from a cure-all for the nation’s retirement challenges, she says several of the provisions represent a step in the right direction. In particular, she notes, reducing the number of hours that employees are required to work in order to sign up for 401(k)s can help expand participation. “That’s helpful for part-time employees, whether they’re just entering the workforce or about to leave,” Cheng says. And she’s in favor of adding flexibility to 529 accounts, which could be used to repay some student loans under the bill. That’s a good option, she says, for parents who may have funds remaining in an educational savings account and want to help a child who has already graduated. “The SECURE Act provides more flexibility,” says Cheng. For David Rae, a financial planner based in Los Angeles, moving the starting age for required minimum distributions to 72 also makes sense, given that people are living longer than they did a generation ago. “Pushing back RMDs will help people make their money last just a little bit longer, especially since more of them need to work later,” Rae says. The Bottom Line Whether the SECURE Act ends up being a retirement game-changer or not remains to be seen. But one thing is abundantly clear: The current rules aren’t allowing nearly enough Americans to put away the nest egg they’ll ultimately need for a secure retirement.
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April 2020
CategoriesAuthorSam S. Cozzi, Jr. is a family man, for whom inspired him to be the man he is today. To provide for his family he followed his interests which led him towards his career as a tax professional. |