Banking & Finance, Education, and Government

Bill aims to improve U.S. retirement prospects

The SECURE Act passed the House in May and awaits a vote in the Senate.

July 12, 2019
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Following the demise of pensions for the majority of Americans, retirement planning is an activity many feel unprepared to handle. A bill circulating in Congress could ease that burden if it becomes law.

H.R. 1994, or the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was introduced in the U.S. House of Representatives on March 29 and passed in a 417-3 vote on May 23. It was introduced in the Senate on June 3 and currently is under consideration.

The legislation is in response to the retirement savings crisis that’s been building for over a decade.

A 2018 study by Northwestern Mutual found that 1 in 5 Americans has no retirement savings at all, while 1 in 3 of those closest to retirement age has less than $25,000 saved, according to an Investopedia article. 

Given longer life expectancies than previous generations, coupled with the rate of inflation, Investopedia recommends a minimum retirement account balance of $1 million by date of retirement.

Phil Mitchell, president at Kroon & Mitchell Integrated Tax and Investments in Grand Rapids, said existing statutes were designed for a reality that no longer exists and currently throw impediments in the paths of people looking to save.

“The old-school pensions are not there,” he said. “People need to save more, (which) is really the biggest challenge, (because) they don’t realize how much the company saved on their behalf for a pension.

“They don’t realize how much they actually need to save or how much they are undersaving. That’s why, at minimum, you want to take away some of the policy restrictions.”

Mitchell said if the bill passes, the three most significant changes would be as follows: 

  • Changing the age for required minimum distributions on retirement accounts from 70½ to 72. This would give older employees more time in the workforce to add to their retirement funds before having to pay taxes on distributions they don’t yet need.

  • Eliminating the age limit for adding funds to retirement accounts. Currently, you can only add funds until age 70½. This would give people who are still in the workforce more time to save.

  • Making changes to inherited retirement accounts. Right now, if you inherit a retirement account, you have your entire life to withdraw the funds. The proposed bill would limit the amount of time you can withdraw those funds to only 10 years. Mitchell said he views this as a way for the government to accelerate tax collection and push some inheritors into a higher tax bracket because they would receive more money in a shorter time period.

The bill, when initially introduced, also contained the following provisions, according to Investopedia:

  • Providing tax credits and protections on collective multiple employer plans, making it easier for small businesses to offer their employees 401(k) plans through a pool. Mitchell said this would likely boost the ability of resource-constrained small businesses with a few employees to offer retirement plans.

  • Allowing retirement benefits for long-term, part-time employees.

  • Allowing penalty-free withdrawals up to $5,000 from retirement plans for the birth or adoption of a child.

  • Relaxing rules on employers offering annuities through sponsored retirement plans.

  • Expanding the uses for 529 education-savings plans to allow individuals to use funds within these accounts for apprenticeships and qualified student loan repayments of up to $10,000.

  • Revising components of the federal tax overhaul that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans.

The House removed the 529 education-savings plan provision before handing the bill to the Senate.

A report from the trade publication Pensions & Investments said the bill is in limbo because several senators have placed holds on it, including Republican Sen. Ted Cruz, who supported the 529 plan provision because it would have allowed those funds to be used for homeschooling expenses and K-12 materials costs, as opposed to only for college expenses.

Mitchell said if the bill passes, it depends on “which hat you’re wearing” as to whether the new law would be a net positive or net negative. Taxpayers may suffer, as well as inheritors and those with high individual retirement account (IRA) balances. But it could be good for older workers and small businesses.

If it passes, he expects the SECURE Act will have “significant” and immediate impact on the tax strategies he currently uses with clients.

The full bill is viewable at Congress.gov, keyword “H.R.1994.” A reader-friendly summary is available by searching “SECURE Act” at Investopedia.com. 

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