Big changes could be coming soon to retirement plans. Last week the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is meant to improve our country’s retirement system. It’s headed for Senate and is likely to pass (or something close to it) because the Senate has been contemplating similar legislation with bipartisan support.
The SECURE Act is meant to address two major issues: (1) to increase the availability of workplace retirement savings plans and (2) to increase longevity of individuals’ funds.
This comes with a lot benefits for retirement planning, but there could be a downside for beneficiaries on the estate side of things.
There are several components to the SECURE ACT, but here we’ll focus on just a few key areas:
Part-time Employees Can Participate in a 401(k) Plan
Congress is recognizing that people are staying in the workforce longer and slowly sliding into retirement. Gone are the days where people retire by age 65, quit full-time employment and pass the time by playing golf. People still feel young and productive at age 65, and they want to continue to work, all the while maintaining an active lifestyle and supplementing their income.
Current laws allow employers to exclude their part-time employees from eligibility for a 401(k) plan. That won’t be the case, if the SECURE Act is passed.
Under the proposed legislation, your employer must allow you to participate in its defined contribution plan if you work at least 500 hours a year and have been at the firm for at least three consecutive years.
Small Business Can Pool Together on Retirement Plans
Opening up a work-based retirement savings plan such as a 401(k) can be costly for small businesses. As a result, many firms choose not to offer them, forcing employees to find savings plans on their own. A provision in the SECURE Act, however, seeks to change that.
The bill expands employers’ abilities to offer multi-employer plans, as long as they have the same trustee, fiduciary, administrator, plan year and investment options, making it easier for small employers to sponsor a retirement plan.
Increased Age for Required Minimum Distributions
Currently, when you reach age 70.5 you have to take a “requirement minimum distribution” out of your retirement fund.
The new bill raises that minimum age to 72 with the intent of ensuring that individuals spend their retirement savings during their lifetime.
The bottom line here is that people are living longer, working later into life, and wanting their retirement savings to last longer.
Expanded 529 Account Flexibility
Why would a retirement bill include more flexibility on 529 education savings plans? Because flexibility means that you are more likely to save, whereas inflexibility decreases the likelihood of saving.
With that in mind, the SECURE Act would allow individuals to use funds within these accounts for apprenticeships and qualified student loan repayments loans of up to $10,000.
A student loan overhaul is still much needed, but this is a step in the right direction
And Now for The Bad News- New 10-year Deadline on Inherited 401(k)s or IRAs
The SECURE Act would change how long you can hold on to a 401(k), a traditional IRA or a Roth IRA that you’ve inherited from someone who’s died. Today’s guidelines say you can stretch the balance out over your lifetime to minimize tax consequences, but under the new bill those balances must be withdrawn within 10 years.
But there are some exceptions. If you’re the surviving spouse or minor child of the account owner, for example, you would not be subject to these new regulations.
The purpose behind this change is to raise money to pay for the provisions of the bill that may cost some money by virtue of increased savings being tax deferred and also to make sure that 401(k) plans and IRAs are not being used indefinitely as tax-deferred vehicles by inheritors.
Under the current rules, parents can ensure that their adult children take advantage of the tax stretch by holding the inheritance in trust for each child, thereby “forcing” the child to keep the inherited retirement account in trust and maximize the stretch. This is a great tool because more often than not, financial institutions don’t even inform the inheritor that stretching the balance over their lifetime is an option. Kids end up cashing out the account, foregoing thousands of dollars in tax savings.
With the new bill limiting the stretch to 10 years, estate planners are going to have to find other vehicles for tax savings.
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