The U.S. Congress is attempting to help future retirees get their financial houses in order.
The government is reacting to a recent study that claims only 51 percent of all Americans are employed by companies with retirement plans and of those employees, only 40 percent actually participate. In addition, experts say one in three Americans have less than $5,000 in retirement savings and 21 percent have none.
Because life expectancies are much longer than previous generations, financial planners recommend that seniors save a minimum of $1 million before retirement. Clearly, many fall short of that goal. It is believed part of the blame lies with the shift from defined benefit retirement plans to defined contribution retirement plans. In the former, an employer guarantees a specific payout to an employee upon retirement. In the latter, an employee designates how much of their check should be earmarked for retirement. Sometimes, an employer matches the contributions or contributes a pre-set amount. The fund is permitted to grow tax-free until retirement. However, employees appear to be more inclined to focus on present financial needs, rather than future ones, putting off retirement saving for another day.
In an effort to change this gloomy retirement forecast, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The bipartisan bill attempts to address the financial readiness of seniors for retirement.
The SECURE Act:
- Encourages small businesses to offer employee retirement plans. The bill permits small businesses to cut through administrative red tape and ignore certain legislative mandates to better tailor retirement plans to their needs. In addition, it permits multiple small employers to band together and create 401 (k) plans. Under the bill, some part-time employees may also have access to employer retirement plans.
- Permits retirees to accumulate more retirement savings over a longer period of time. The bill raises the required minimum distribution age for retirement plans from 70.5 to 72. In addition to permitting retirement plans to earn more over an extended period of time, the bill will also make retirement savings last longer. The year-and-a-half delay in distributions will result in a larger retirement account and prevent seniors from spending their savings sooner.
- Removes the age limits on contributions to IRAs. Previously, no contributions were permitted after age 70.5. The bill removes that restriction.
- Creates more payout options for annuities purchased through employer retirement plans. The SECURE Act would permit lifetime-income investments, such as annuities, to be paid out in monthly installments as well as in a one-time lump sum. This provision was adopted in a response to a study that found 62 percent of non-retired employees would rather receive income from an annuity in monthly installments over their lifetime, rather than in a one-time payment.
- Changes payout options for beneficiaries of retirement plans. Currently, beneficiaries of retirement plans can stretch-out distributions over their expected lifetime, permitting the funds to continue to grow tax-free. The SECURE Act eliminates this stretch-out option, requiring that non-designated beneficiaries, such as trusts, receive all retirement benefits within five years of the retirement fund owner’s death. Designated beneficiaries or individuals must withdraw all funds within 10 years of the owner’s death. The 10-year rule does not apply to the decedent’s spouse, minor child, disabled or chronically ill designated beneficiaries, or designated beneficiaries who are not more than 10 years younger than the decedent.
- Expands the use of 529 account funds. The House Ways and Means Committee removed a provision that would permit beneficiaries of 529 college saving plans to use such plans to pay for homeschooling, special needs students, and private education. However, the new bill does authorize penalty-free withdrawals of not more than $10,000 to pay for certain student loans and apprenticeships.
The U.S. Senate is considering its own financial retirement measure—The Retirement Enhancement and Savings Act (RESA). For the most part, the SECURE Act and RESA are similar. The differences lie in proposed changes to the stretch-out rules. However, given the bipartisan support for the SECURE Act—the bill passed by 417 to 3 votes—it is believed that bill has the greatest chance of being enacted. The act must pass a vote in the U.S. Senate before it becomes law.
Either bill will have a significant impact on retirement planning. For that reason, it is important to consult with your estate planning attorney on a regular basis to address any new developments.