On May 23, 2019, the House approved the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 by a vote of 417 to 3, extending the age when investors must start taking distributions along with many other provisions.
Most notably, one major provision includes moving the beginning of RMDs (Required Minimum Distributions) from the age of 70 & ½ to 72 for IRA accounts. Another provision allows those over 70 & ½ to contribute to IRA accounts. These increases in flexibility are not, however, without a cost.
For example, one provision requires most non-spouse inheritors of 401(k) and IRA accounts to withdraw the entire account within 10 years of the account owner’s death. Under current rules this can be stretched out over the beneficiary’s life expectancy. This makes an inherited IRA a less attractive intergenerational wealth transfer mechanism. This is even more notable given the advantage of the step up in basis at death on non-qualified accounts; this could make the new provision to contribute to IRA accounts after age 70 & ½ less attractive. Given this change, use of Qualified Charitable Distributions (QCDs) may become more attractive in some circumstances, particularly given the higher standard deduction for a married couple over 65 ($27,000 in 2019).
Another downside: Under present rules there exists the flexibility of making a final determination of designated beneficiary on a 401k plan on Sept. 30 of the year after the year when the employee dies. The proposed law provides that the determination of an eligible designated beneficiary shall be made as of the date of the employee’s death. There will be no option for a trustee to make the beneficiary designation after death, so disclaimers will offer the only path to change designated beneficiary status. This means beneficiary designations must be carefully reviewed and pre-determined regularly.
There are many other provisions included in the proposed bill:
- It permits long-term part-time workers easier access to 401(k) plans
- It provides for penalty-free withdrawals for qualified birth or adoption distributions
- It allows 529 plans to be expanded to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or faith-based schools.
The bill now moves to the Senate, which is considering its own retirement bill—the Retirement Enhancement and Savings Act (RESA). More to follow!
Everyone’s situation is different. Included above are some ideas worth re-evaluating if and when this bill becomes law. There may be other tools to be considered as well. Ask your Wealth Manager to review your options with this potential new legislation in mind.