The Retirement Enhancement and Savings Act
On April 2, the House Ways and Means Committee passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The Senate has also introduced a companion bill to the SECURE Act called the Retirement Enhancement and Savings Act (RESA).
Although both bills have a way to go, they merit watching. Both bills have strong bipartisan support in Congress. Both bills also have their winners and losers. Here are a few.
Winners
<h3class=”has-text-color” style=”color: #72953d; font-size: 24px;”>Retirees who are about to start RMDs
Think of IRAs as a partnership between you and the government. You contribute salary and they let you borrow and invest their portion (taxes). At age 70 ½, the government says thanks, but you have borrowed our money long enough. We would like it back. At that time (70 ½), you are required to begin taking minimum distributions based on your life expectancy. The new legislation proposes moving the start age to 72. No word on how this would impact Qualified Charitable Distributions.
Workers over the age of 70 1/2
Remember those RMDs? At 70 ½ not only do you have to take money out of your IRA, but you also aren’t allowed to contribute to the account anymore. The new legislation would remove that limit for IRAs.
Students with 529 Plans
The Tax Cut and Jobs Act (TCJA), passed in 2017, was monumental for education savings. 529 Plans which were previously only useful for college saving, were given a new lease on life. The TCJA allowed 529 funds to be used for K-12 tuition expenses. The SECURE Act goes even further, allowing funds to be used for home schooling, apprenticeship programs and up-to $10,000 for the repayment of student loans
New parents with IRAs
Currently you cannot withdrawal money from an IRA without incurring a 10% penalty before 59 ½ unless you meet one of a few exceptions. The new legislation allows penalty-free distributions up to $5,000 from IRAs within the first year of birth (or adoption) of a child to cover associated expenses.
Annuity companies
The new legislation explicitly permits lifetime annuities. The requirements are that those annuities are 1) portable and 2) that they display what the monthly payment would be.
Loser
IRA beneficiaries
Remember the saying, there is no free lunch? Someone has to pick-up the tax bill for the changes. And remember that this bill’s aim is to secure retirement. It is less concerned with preserving your estate for your heirs.
Remember the saying, there is no free lunch? Someone has to pick-up the tax bill for the changes. And remember that this bill’s aim is to secure retirement. It is less concerned with preserving your estate for your heirs.
In the IRS’s eyes, there are two types of IRA/Roth IRA beneficiaries: spousal and non-spousal. If you are the spouse, you may have the ability to continue your deceased spouses RMD or begin taking RMDs based on your own life expectancy.
If you inherit an IRA from someone who is not your spouse, you currently have the option to take distributions based on your life expectancy—the “stretch provision”. That wasn’t always the case. Prior to the latest iteration of the tax law, non-spouse beneficiaries were required to take the balance of the entire account over a 5-year period. Although the new tax law doesn’t revert to the 5-year period, it does require non-spouse beneficiaries to distribute the balance of the account within 10 years.
Conclusion
Ultimately, we don’t know whether this legislation will come to pass in 2019 or if anything will be changed. But expect to hear more about both the SECURE/RESA Acts over the coming months as they make their way thru Congress. If nothing else, it is somewhat encouraging that Congress can reach an agreement on any legislation.
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