by LFG Tax Director, Mark Sipos
On May 23rd, 2019, the U.S. House of Representatives voted overwhelmingly in favor of the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement.” Most of the provisions in the act are designed to make it easier for more people to save for retirement, and for more employers to offer retirement plans for their employees.
One notable provision in the bill would essentially end what’s known as the “stretch IRA.” Under the current law, when a beneficiary inherits an IRA, the beneficiary can choose to have the IRA balance distributed in two ways: either in required minimum distributions based on his or her life expectancy, or during the five years after the original account holder passes. Making maximum use of the IRA’s taxdeferred compounding like this is known as a “stretch IRA.” Under SECURE, in most instances an inherited IRA would have to be fully distributed within 10 years of the original owner’s death, although there are some exceptions.
Some additional areas the bill covers are as follows:
- The repeal of the maximum age for traditional IRA contributions, which is currently 70½
- An increase of the required minimum distribution age for retirement accounts to 72 (up from 70½)
- Allowing long-term part-time workers to participate in 401(k) plans
- Increase of the auto-enrollment safe harbor cap to 15% from 10%
- Allowing more annuities to be offered in 401(k) plans
- Parents can withdraw up to $5,000 from retirement accounts penalty-free within
- a year of birth or adoption for qualified expenses
- Parents can withdraw up to $10,000 from 529 plans to repay student loans
A similar bill, titled the “Retirement Enhancement and Savings Act” (RESA) is in the Senate Finance Committee. This also would do away with the ‘stretch IRA,” provision above. While the Senate (RESA) bill generally overlaps and shares a great deal with the House Bill (SECURE), the main difference between the two is that the Senate bill does not change the maximum age for Traditional IRAs from 70 ½. While there is broad, bipartisan support, the Senate has yet to vote on RESA. If it does pass, and it’s materially different from the version in the House, the revised bill would come before the House again, and then move on to the President. While the timeline is uncertain, it certainly bears watching, as it will affect most of our retirement plans in some way. We will monitor the legislation and keep you informed of any changes.
