Even with the gridlock in Washington there are some bipartisan bills that are advancing through the process to become law. Among the bills inching forward is the SECURE Act (Setting Every Community Up for Retirement Enhancement). This bill has passed the House or Representatives and is now under consideration by the Senate. Should the Senate pass the bill it will be sent to the President for signature, however, the White House has not yet commented on whether the President will support or veto the bill.
The SECURE Act has a number of provisions that will impact retirement planning. These include:
The bill would increase the age at which individuals must begin taking Required Minimum Distributions (RMDs) from their tax deferred retirement accounts (IRAs, 401ks, 403bs, etc.) from 70.5 currently to age 72. For many retirees this will delay the year in which they need to start taking taxable income out of their retirement accounts. This will make retirement income last longer and allow for more tax planning flexibility for many retirees. In addition, the bill would eliminate the rule that prohibits IRA contributions for individuals over age 70.5.
The bill aims to increase access to 401k-type plans to more employees. Specifically, the bill contains provisions that will make it easier for small employers to provide their employees with a 401k-type retirement savings plan. In addition, the rules for 401k-type plans will be relaxed to provide increased access to part-time workers who may not currently meet the minimum hour requirement to be able to participate in their employer’s retirement plan. This will give more people access to a tax-deferred retirement savings vehicle.
The bill will also allow more 401k plans to offer an annuity payout option. Under this provision plan participants will have the option of giving their account balance to an insurance company in exchange for the promise of monthly income for life. In the past employers have been hesitant to offer this option as the potential liability should the insurance company fail or participants not realize the irrevocability of such a decision was viewed as too high. The SECURE Act would change the law to shift the liability from the employer to the employee so that employers may be more likely to offer this option. However, there is still some concern that many employees will not have access to impartial financial advice and may not be in a good position to make an informed decision.
The bill will allow withdrawals of up to $10,000 per year from 529 educational savings accounts to pay off student loans. This addresses a common problem where parents may create a college funding plan for multiple children which includes 529 plan distributions and student loans. In some cases they may end up with a remaining balance in the 529 plan and one or multiple children with outstanding student loans. In the past, any money distributed from a 529 plan to pay off student loans was subject to tax and penalty on the plan earnings. The SECURE Act will change this so that 529 plan balances can be accessed to pay off student loans without incurring the taxes or penalty.
The SECURE Act still has a long way to go before it may become law. Therefore, it is too early to start incorporating these provisions into a financial plan. However, there is a possibility that these changes to the law will be implemented which may create some future planning opportunities. In addition, even if the SECURE Act does not become law it gives some insight into the areas where Congress is seeking to make changes to the personal finance laws and regulations.