The “most significant” changes included in the recently proposed SECURE Act and RESA bill fall into two buckets: efforts to get more small businesses to offer workplace retirement savings plans and changes to IRA rules, including on required minimum distributions, according to Elizabeth Kelly, the former special assistant to the president on the National Economic Council for the Obama administration.
Kelly, who is now senior vice president of operations at United Income, a retirement planning firm, told ThinkAdvisor in a Wednesday email message that both the Senate Finance Committee’s Retirement Enhancement and Savings Act (RESA) and the House Ways and Means Committee’s Setting Every Community Up for Retirement Enhancement, or SECURE, Act “would allow older Americans still in the workforce to continue making tax-deferred contributions to traditional IRAs after age 70.5, rather than just post-tax contributions to Roth IRAs and brokerages.”
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While intended to help older Americans who are still working, Kelly said, “this is a small percentage of the population: 14.09% of people age 71-80 report being in the labor force,” citing the January 2019 Current Population Survey.
Both bills, Kelly points out, “would also raise revenue by requiring inheritors of 401(k) plan and IRA balances (with some exceptions, like spouses or minor children) to withdraw the entirety of the balance within 10 years of the account owner’s death.”
The SECURE Act passed the House Ways and Means Committee on Tuesday, and is said to be headed to the House floor soon. The Senate Finance Committee’s RESA bill was introduced Monday and no committee action is scheduled yet.
Indeed, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, said on the Senate floor Wednesday that the RESA bill “is paid for,” with the main offsetting provision involving the “option under current law for a person to pass along his or her IRA or 401(k) account to a family member or other beneficiary.”
Under current law, Grassley said, “the recipient of that account can keep the inherited funds in the tax deferred account and save for their own retirement if they take out a required minimum distribution amount each year,” what’s often referred to as a stretch IRA.
“The bill maintains this savings option for people who inherit an IRA or retirement account, but it places a limit on how large an account can be inherited on a tax-protected basis. This is a common sense approach to encourage the next generation to save for retirement while ensuring that the changes in this bill are fiscally responsible,” Grassley said.
Former tax attorney Andy Friedman of The Washington Update told ThinkAdvisor on Friday that both the SECURE Act and the RESA bill include the stretch IRA provision. “The House version requires a maximum of 10-year payout,” Friedman said. “The Senate version allows a maximum $450K stretch. I would think the final bill incorporates one of them, but the stretch provision was dropped in committee last time, so one can’t be sure.”
Friedman said that the stretch IRA provision is likely the RESA bill’s “primary” revenue vehicle.
The “primary mechanism” in the RESA bill is to allow small businesses “to band together and create so-called open multiple employer plans, rather than offering a plan alone or requiring a ‘common bond’ between employers as under current law,” Kelly explained.
“There is bipartisan agreement that open MEPs are a good way to increase small-business offering of retirement plans and get more workers to save,” Kelly continued, adding that President Barack Obama proposed open MEP legislation in his fiscal 2017 budget, and the Labor Department is working on similar regulations pursuant to President Donald Trump’s August executive order.
As it stands now, the SECURE Act does not include an open MEP provision, Kelly said, but both the SECURE Act and RESA “include another provision to encourage small businesses to offer retirement plans: a new tax credit of up to $500 per year to employers to defray startup costs for new plans that include automatic enrollment.”
The SECURE Act also includes another Obama budget proposal, Kelly points out, “that could expand access by enabling long-term, part-time workers (who generally do not have access to workplace retirement plans) to contribute to their employers’ plans.”
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