Recently, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 by a vote of 417-3. Let’s take a look at this legislation, how it affects seniors and those with disabilities, and the next steps ahead.
The federal government is taking notice of how prepared, or unprepared, Americans are for retirement. According to a 2013 survey, only 51% of all American workers were employed by companies that offered retirement plans. Of those, 40% actually participated in the plan. According to an article by The Motely Fool, one in three Americans have less than $5,000 in retirement savings. Some 21% have no retirement savings at all.
The SECURE Act of 2019 aims to do the following:
Make it easier for small businesses to offer retirement plans for their employees;This will be accomplished by cutting through administrative burdens, including paperwork and red tape. Also, local businesses will be able to better tailor retirement plans for their needs, instead of conforming to certain mandates. Smaller companies may be able to join forces with other small companies to form multiple employer 401(k) plans. Finally, some part-time workers will now have access to employer plans.
Raise the required minimum distribution age for retirement plans from 70.5 to 72;This will allow retirement savings to continue to grow, and allow for more asset accumulation for seniors. This aims to keep seniors from spending their money too early in retirement, and allow the money to last longer. The power of compound interest is staggering, and allowing the process continue longer will likely result in a greater nest egg for seniors.
Repeal the maximum age for making traditional IRA contributions;Seniors would be allowed to save longer under these plans, and thus have more retirement savings.
Facilitate access to annuities in retirement plans;According to a report by the Teachers Insurance and Annuity Association of America, 62% of all non-retired respondents would prefer to receive $2,700 a month for the rest of their lives rather than $500,000 all at once. The SECURE Act would create more options for lifetime-income investments within employer plans.
Change stretch-out options.The SECURE Act will eliminate the stretch-out option for most beneficiaries. This impacts elder law planning, as elder law attorneys often tailor end-of-life plans around a large retirement account. Rules regarding how these funds can be inherited are complex and strict. Currently, a designated beneficiary can stretch-out distributions from the retirement plan over their life expectancy, through conduit or accumulation trust provisions. This strategy can allow those funds to continue to grow, tax-free, for many years. A designated beneficiary is defined as an individual – not a trust. If the beneficiary is not a designated beneficiary, then the retirement benefits must be distributed within 5 years of the participant’s death. As noted above, the SECURE Act will eliminate the stretch-out option for most beneficiaries. The new rule would declare that a designated beneficiary must withdraw all of the funds from the retirement plan within 10 years of the participant’s death. This would likely result in a much shorter time-frame for a designated beneficiary to keep the funds growing in the retirement plan and may upend planning strategies for many attorneys. However, there are exceptions to the new 10-year rule: if the beneficiary is the participant’s spouse, the participant’s minor child, disabled or chronically ill, or is not more than 10 years younger than the participant.
Before the bill was passed by the House, the House Ways and Means Committee removed a portion of the bill allowing 529 account funds to be used for private education, homeschooling, and special needs students. However, 529 funds can still be used to pay for student loans and apprenticeships.
While the SECURE Act has passed in the House, it has yet to hit the Senate. Indeed, the Senate has their own dueling legislation – The Retirement Enhancement and Savings Act (RESA). While both pieces of legislation are similar, there are some differences, including how the stretch-out rules will culminate. All eyes are on Congress to see which Act will pass, and with what terms. And, of course, President Trump must sign the resulting legislation for it to become law. Because of the potential impact this could have on trust planning, we will keep our readers informed of any major developments.
You can read the full text of the bill and track its progress here.