It came from Washington – a good title, perhaps, for a terrifying late-night cinema extravaganza – so what can we expect?
In the best cases, federal legislation repairs some damage, paves the way for a step forward, wastes a little money on fripperies not directly germane to the project, and steps aggressively on a few toes. It’s politics, not rose gardening, no matter where the president finally signs the thing.
Consider the SECURE Act – the Setting Every Community Up for Retirement Enhancement Act of 2019, currently the law. The bill should be good, because both warring parties supported it and the president signed it with alacrity – in ultra-contentious times, efficient action is a good sign. As always, though, the bag is mixed.
Good news being rare today, that’s where we’ll start. The age for taking the first required minimum distribution (RMD) from retirement plans has been raised from the puzzling 70½ to 72. This introduces welcome flexibility and has beneficial tax planning implications for older workers (see below).
This change is a good idea, which unfortunately does not apply to everyone – people who crossed the age boundary before the law was enacted must still follow the old rules. Fairness can be cruel.
Intimately linked is a welcome shift in the IRA rules: workers can now make contributions to these accounts past the age of 70½, assuming they are still employed. With people living healthier and working longer, this is a real boon.
Part-timers have been laboring with limited access to the best retirement-planning tools, including the ubiquitous 401(k). For long-term, part-time workers, the rules are now easier for signing up to their employer’s 401(k) plan. Small businesses, another vital but sometimes ignored player in the economy, now get a tax credit for launching retirement savings plans, assuming they don’t already offer one.
Families gained a few new tools to ease their lives: when a child is born or adopted, each parent can withdraw up to $5,000 from a retirement account without penalty. Also, withdrawals of up to $10,000 can be made from 529 accounts to pay off student loans. These provisions provide good news all around the nation.
Undepleted retirement accounts are commonly left to heirs. Under the old regime, a well-provided IRA or 401(k) could provide a nice annual income for a recipient’s actuarily defined lifespan. The SECURE Act introduces a radical change: recipients of qualified retirement accounts now have only ten years to empty the account. There is no RMD, but ten years following the original holder’s death, the account must be depleted. If it isn’t, the funds come out automatically, with possibly severe tax implications.
Some observers see this change as only moderately negative: ten years is ample planning time to mitigate the consequences. The government’s aim here is to gather in more taxes: the well-tested and favored stretch IRA strategy is now ruled out, and in many cases, the short withdrawal window will mean a higher tax bracket and bill for the recipient heir.
We can’t honestly fault the legislators for creating new revenue sources and original account holders suffers no penalty, nor do inheriting spouses and certain vulnerable categories of heirs, who are exempt from the 10-year rule.
However, the whole SECURE Act exercise is aimed at making retirement saving easier – boosting the IRS’s intakes is a side matter. People inheriting retirement accounts will now be forced to take withdrawals smack in the middle of their prime working years, with no option to ‘stretch’ the RMDs out into retirement. The news isn’t all bad, perhaps, but it certainly isn’t pretty.
There’s a truism that says the state helps with one hand and takes back with the other. Such is the case, if perhaps not extreme, with the SECURE Act.
For more information, please read:
‘The Good, The Bad And The Ugly’ Of The SECURE ACT | Forbes