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All Contents © 2019The Kiplinger Washington Editors
By Rocky Mengle, Tax Editor
| July 16, 2019
With the decline of traditional pensions, most of us are now responsible for squirrelling away money for our own retirement. In today's do-it-yourself retirement savings world, we rely largely on 401(k) plans and IRAs. However, there are obviously flaws with the system because about one-fourth of working Americans have no retirement savings at all—including 13% of workers age 60 and older.
But help may be on the way. The House of Representatives recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which would affect your ability to save money for retirement and influence how you use the funds over time if it is ultimately enacted. While some of the act's provisions are administrative in nature or intended to raise revenue, most of the proposed changes are taxpayer-friendly measures designed to boost retirement savings. To get you ready in case this bill becomes law, we've highlighted 10 of the most notable ways the SECURE Act could affect your retirement savings. Learn them now, so you can start adjusting your retirement strategy right away if it is enacted.
Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs are a thorn in the side of many retirees. Every year, my father grumbles about having to take money out of his IRA when he really doesn't want to. Right now, RMDs generally must begin in the year you turn 70½. (If you work past age 70½, RMDs from your current employer's 401(k) aren't required until after you leave your job, unless you own at least 5% of the company.)
The SECURE Act would push the age that triggers RMDs from 70½ to 72, which means you could let your retirement funds grow an extra 1½ years before tapping into them. That could result in a significant boost to overall retirement savings for many seniors.
Americans are working and living longer. So why not let them contribute to an IRA longer? That's the thinking behind one SECURE Act proposal to repeal the rule that prohibits contributions to a traditional IRA by taxpayers age 70½ and older. If the SECURE Act is enacted, you could continue to put away money in a traditional IRA if you work into your 70s and beyond.
There are currently no age-based restrictions on contributions to a Roth IRA.
Part-time workers need to save for retirement, too. However, employees who haven't worked at least 1,000 hours during the year typically aren't allowed to participate in their employer's 401(k) plan.
That could change under the SECURE Act. If enacted, it would guarantee 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer would also have to be 21 years old by the end of the three-year period. The rule wouldn't apply to collectively bargained employees, though.
Congratulations if you have a new baby on the way or are about to adopt a child! Right after you pass out the cigars, you'll probably start worrying about how you're going to pay for the birthing or adoption costs. If you have a 401(k), IRA or other retirement account, the SECURE Act would let you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. (You'd still owe income tax on the distribution, though, unless you repay the funds.) If you're married, each spouse could withdraw $5,000 from his or her own account, penalty-free. Although using retirement funds for child birth or adoption expenses would obviously reduce the amount of money available in retirement, some lawmakers believe this SECURE Act provisions would encourage younger workers to start funding 401(k)s and IRAs earlier.
If the SECURE Act is enacted, you would have one year from the date your child is born or the adoption is finalized to withdraw the funds from your retirement account without paying the 10% penalty. You could also put the money back into your retirement account at a later date. Recontributed amounts would be treated as a rollover and not included in taxable income.
If you're adopting, penalty-free withdrawals would generally be allowed under the SECURE Act if the adoptee was younger than 18 years old or was physically or mentally incapable of self-support. However, the penalty would still apply if you're adopting your spouse's child.
Knowing how much you have in your 401(k) account is one thing. Knowing how long the money is going to last is another. Currently, 401(k) plan statements provide an account balance, but that really doesn't tell you how much money you can expect to receive each month once you retire.
To help savers gain a better understanding of what their monthly income might look like when they stop working, the SECURE Act would require 401(k) plan administrators to provide annual "lifetime income disclosure statements" to plan participants. These statements would show how much money you could get each month if your total 401(k) account balance were used to purchase an annuity. (The estimated monthly payment amounts would be for illustrative purposes only.)
The disclosure statements wouldn't be required until one year after the IRS issued interim final rules, created a model disclosure statement or released assumptions that plan administrators could use to convert account balances into annuity equivalents, whichever happened last.
Speaking of annuities … the SECURE Act would, if enacted, also make it easier for 401(k) plan sponsors to offer annuities and other "lifetime income" options to plan participants by taking away some of the associated legal risks. These annuities would be portable, too. So, for example, if you left your job you would be able to roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.
More companies are automatically enrolling eligible employees into their 401(k) plans. Workers can always opt out of the plan if they choose, but most don't. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible.
The employer sets a default contribution rate for employees participating in an auto-enrollment 401(k) plan. The employee can, however, choose to contribute at a different rate. For a common type of plan known as a "qualified automatic contribution arrangement" (QACA), the employee's default contribution rate starts at 3% of his or her annual pay and gradually increases to 6% with each year that the employee stays in the plan. However, under current law, an employer cannot set a QACA contribution rate exceeding 10% for any year.
If enacted, the SECURE Act would push the 10% cap on QACA automatic contributions up to 15%, except for a worker's first year of participation. By delaying the increase until the second year of participation, some lawmakers want to avoid having large numbers of employees opt out of these 401(k) plans because their initial contribution rates are too high. Overall, the proposed change would allow companies offering QACAs to ultimately put more money into their workers' retirement accounts while keeping the potential shock of higher initial contribution rates in check.
It's simply harder to save for retirement if your employer doesn't offer a retirement savings plan, because all the work falls to you. Although most large employers have retirement plans for their workers, the same can't be said about small businesses. That's why the SECURE Act has three provisions designed to help more small businesses offer retirement plans for their employees.
First, the SECURE Act would increase the tax credit available for 50% of a small business's retirement plan start-up costs. Currently, the credit is limited to $500 per year. However, if it becomes law, the SECURE Act would increase the maximum credit amount to $5,000.
Second, the SECURE Act would create a brand new $500 tax credit for a small business's start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit would be available for three years and would be in addition to the existing credit described above. The credit would also be available to small businesses that convert an existing retirement plan to an auto-enrollment plan.
Third, the SECURE Act would make it easier for small businesses to join together to provide retirement plans for their employees. If enacted, it would permit completely unrelated employers to participate in a multiple-employer plan and have a "pooled plan provider" administer it. This provision would allow unrelated small businesses to leverage economies of scale not otherwise available to them, which typically results in lower administrative costs.
Contributions to a retirement account generally can't exceed the amount of your compensation. So if you receive no compensation, you generally can't make retirement fund contributions. Under current law, graduate and post-doctoral students often receive stipends or similar payments that aren't treated as compensation and, therefore, can't provide the basis for a retirement plan contribution. Similar rules and results apply to "difficulty of care" payments that foster-care providers receive through state programs to care for disabled people in the caregiver's home.
If the SECURE Act becomes law, amounts paid to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) would be treated as compensation for purposes of making IRA contributions. This would allow affected students to begin saving for retirement sooner. Similarly, "difficulty of care" payments to foster-care providers would also be considered compensation when it comes to 401(k) and IRA contribution requirements.
Now for some bad news: The SECURE Act would eliminate the current rules that allow non-spouse IRA beneficiaries to "stretch" required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally would have to be distributed to non-spouse beneficiaries within 10 years of the IRA owner's death. (The rule would apply to inherited funds in a 401(k) account or other defined contribution plan, too.)
There would be some exceptions to the general rule, though. Distributions over the life or life expectancy of a non-spouse beneficiary would be allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception would only apply until the child reached the age of majority. At that point, the 10-year rule would kick in.
If the beneficiary is the IRA owner's spouse, RMDs are still delayed until end of the year that the deceased IRA owner would have reached age 72 (age 70½ before the new retirement law).
There are plenty of potential drawbacks to borrowing from your retirement funds, but loans from 401(k) plans are nevertheless allowed. Generally, you can borrow as much as 50% of your 401(k) account balance, up to $50,000. Most loans must be repaid within five years, although more time is sometimes given if the borrowed money is used to buy a home.
Some 401(k) administrators allow employees to access plan loans by using credit or debit cards. However, the SECURE Act would put a stop to this. If enacted, the SECURE Act would prohibit 401(k) loans provided through a credit card, debit card or similar arrangement. This proposed change is designed to prevent easy access to retirement funds to pay for routine or small purchases. Over time, that could result in a total loan balance the account holder can't repay.