New Retirement Plan/IRA Legislation

 

Weekly Update – New Retirement Plan/IRA Legislation

Earlier this week, the Ways and Means house committee passed the SECURE Act.  This provisions of the bill would be the most signficant to retirement plans since the Pension Protection Act of 2006.

The Senate is creating their own version with similar concepts that could find its way to the president’s desk by the end of this year.  Here are the significant provisions of this legislation:

• Move the RMD from age 70.5 to age 72.  RMD’s are required distributions from pre-tax monies such as IRAs and 401ks.  Also will allow those over age 70 to save in an IRA if still working.

 

• Inherited IRAs would need to be distributed over a 10 year period.  Inherited IRAs are frequently those IRAs that are passed from parents to children, allowing tax deferral and investing to continue and the children to take distributions over their lifetime.  The Senate’s version of the bill would instead cap the Inherited IRA at $450,000.

 

• Heavy use vehicle excise tax increases through information sharing between the IRS and US customs and Border Protection.  This is one of the “pay-fors” of the bill.

 

• Allowing qualified 529 plan distributions to student loans.

 

• Creating a $500 tax credit to businesses that start 401k plans, and auto enroll their employees.

 

• Allowing businesses to pool together for their 401k plan, also called a Multiple Employer Plan on more flexible terms.

 

• Creating a “Safe Harbor” for employers that use a group annuity contracts with a lifetime income stream option for their 401k provider.  This “Safe Harbor” means the employer cannot be held liable for underperforming investments and/or high fees as long as they follow certain procedures.

My Analysis:  In my opinion, this seems to be the result of the lobbying efforts of the insurance industry.  Looking carefully at the wording used by the bill’s sponsors, you will frequently see the phrase Retirement “Income” Crisis, not a Savings crisis, but an Income crisis.

The main selling point of this legislation would allow you as an employee to turn your 401k savings into a lifetime annuity inside of your 401k plan.  You can already to that if you simply roll out your 401k and buy an lifetime annuity.  In fact, you can shop which annuity company gives you the most competitive rate, which you will not be able to do inside of a 401k plan.

To pay for this bill, they are trying to eliminate the Inherited IRA, one of the greatest planning tools we have as a way to pass retirement savings to children in a tax efficient manner.

In my experience, instead of a $500 tax credit, what the 401k industry needs is for plans to become easier and more simple to operate, this legislation does the exact opposite.  I would guess that it will lead to more annuity companies in the 401k marketplace, an increase in fees, an increase in administrative burdens, and in confusion.

What does this mean for you?  If this passes, Roth conversions in retirement have to be analyzed.  I’ll be doing this analysis for existing clients based on the final rules, and what they ultimately decide to do with the Inherited IRA.

I hope this information was helpful, as always please do not hesitate to contact the office with any questions.  Have a great weekend!

Best,

Clint