Divided government in Washington isn’t stopping all action Even the President’s declaration that he won’t work with Congress as long as it is investigating him hasn’t put a hold on all work. A determined, bipartisan group of leaders in both houses of Congress wants to make significant changes in retirement plans, and they’re pushing forward despite all the other distractions.
The House of Representatives Thursday voted 417-3 in favor of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. A similar bill, titled the Retirement Enhancement and Savings Act (RESA) is in the Senate Finance Committee.
A sleeper provision in the bill essentially would end the Stretch IRA. Under current law, when a beneficiary inherits an IRA, the beneficiary generally can choose to have the IRA balance distributed in required minimum distributions based on his or her life expectancy. Making maximum use of the IRA’s tax-deferred compounding like this is known as a Stretch IRA.
Under SECURE, in most instances an inherited IRA would have to be fully distributed within 10 years of the original owner’s death. There are exceptions, such has for minor children and disabled beneficiaries. The Senate version has a different provision that still would terminate most Stretch IRAs. I’ll have more details about how to respond to the likely end of the Stretch IRA in a future post.
SECURE aims to increase retirement savings in a number of ways. Employers would be allowed to increase the automatic 401(k) plan contribution amount to 15% of employee pay from 10%. Part-time workers with at least 500 hours of employment in each of three consecutive years would have to be allowed to participate in 401(k) plans.
Also, the age limit for contributions to traditional IRAs would be eliminated. Current, contributions aren’t allowed after age 70½. Likewise, required minimum distributions from traditional IRAs would be deferred to age 72. (The Senate RESA would raise the age to 75.)
SECURE makes it easier for employers to band together to form multi-employer retirement plans. Currently, employers generally have to be in a similar industry to form a multi-employer plan. Under SECURE, unrelated employers can potentially reduce costs and offer better retirement plans by joining multi-employer plans.
Small businesses would be allowed a tax credit of up to $500 to help pay for the cost of establishing and maintaining retirement plans for employees.
It also would be easier for retirement plans to offer annuities to retiring employees under SECURE. Plans also would be allowed to give employees an annual estimate of the income that would be generated by the current balance in their 401(k) accounts.
Many other provisions in SECURE are technical but are designed to reduce the paperwork and cost of establishing and maintaining a retirement plan for employees. Congress hopes this will encourage more employers to offer or improve their retirement plans.
The Senate’s RESA isn’t identical to SECURE, but key senators hope to speed the legislative process by having the Senate pass SECURE by unanimous consent.