Congress is currently set to tackle the most comprehensive retirement legislation in recent history, with a focus on alleviating the looming retirement crisis facing many Americans today. On May 23, 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House by an unprecedented bipartisan vote of 417-3, and, in one form or another, is expected to move through the Senate.
If officially passed, the Act will have a major impact on the path to retirement. In fact, the Report on the Economic Well-Being of U.S. Households in 2018 from the Federal Reserve released in May showed:
Thirty-six percent of non-retired adults think that their retirement saving is on track, but one-quarter have no retirement savings or pension whatsoever. Among non-retired adults over the age of 60, 45 percent believe that their retirement saving is on track.
There are many elements to the bill that we believe will benefit the majority of savers, such as increasing access to plans for long-term part-time workers or allowing small businesses to pool together in order to offer 401(k)s. The new legislation also makes it easier for consumers to include annuities in their 401(k)s. While annuities can be a logical replacement investment for a pension, they can be expensive and draw participants into long-term complex contracts that are not transparent as to the underlying investments.
Here are few components of the SECURE Act that might affect you:
Required Minimum Distributions (RMDs): RMDs are the amount one is required to withdraw from tax-deferred retirement accounts each year. Currently, RMDs take effect at age 70 ½, which to date has caused confusion for many and ultimately resulted in tax penalties. The bill increases the age from 70 ½ to 72, eliminating confusion tied to the half-year requirement; in addition, with individuals living longer and working longer, the bill allows participants to save for longer, which is valuable.
Inheritance of an IRA or 401(k): One provision in the bill relates to the passing of an IRA or 401(k) to beneficiaries after death. Under the current bill, with the exception of spouses or children that are minors, inheritors of a 401(k) or IRA would be required to withdraw the entire balance within 10 years, as opposed to over the beneficiary’s life expectancy. While this action is meant to incentivize younger generations to save more for retirement, it likely shortens the opportunity for tax-deferred growth.
Newborn and student expenses: Under the SECURE Act, parents are able to withdraw up to $5,000 for qualified expenses within a year of the birth or adoption of a child from applicable eligible, or qualified retirement plans. These include defined contribution plans such as 401(k)s and 403(b)s, but not defined benefit plans, or pensions. Parents can also withdraw up to $10,000 from a 529 plan – a tax-advantaged savings plan specifically designed for future education costs.
The above covers just a few of the changes that may come into play if a version of the SECURE Act becomes law. The Act will most likely affect your current and long-term financial planning efforts. If you have any questions about the SECURE Act and your plan, please contact us directly.
DISCLOSURE: This material is proprietary and is produced by Reynders, McVeigh Capital Management, LLC, including its division Fresh Pond Capital (collectively, “RMCM”) for educational and informational purposes only. This should not be construed as a research report, a recommendation, or investment advice, and should not be relied on as such. The opinions expressed in this material are subject to change and represent the current, good-faith views of RMCM at the time of publication (June 2019). All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed, and RMCM disclaims any duty to update any of the information and data contained herein. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future results.