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The SECURE Act and Your Retirement Accounts

A relatively radical bill moving through Congress will mostly eliminate passing on to heirs the benefits of tax-deferred and tax free IRAs. Why haven’t you heard anything about this money grab? Maybe because the bill has so much bipartisan support instead of political drama that the media is not paying attention.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which would reform various aspects of US retirement laws, was approved almost unanimously (417-3) by the House of Representatives.

The bill contains 29 new provisions. Despite its name, many of these provisions are anything but retirement “enhancements.” They will, however, enhance tax revenues flowing to the US Treasury.

Among the revenue enhancements are changes to the rules regarding distributions from inherited IRAs. Currently, the required withdrawals can be spread out over the life expectancy of the heir—which, of course, could extend for decades. The new bill would require most beneficiaries to take the money out and pay the taxes over a ten-year period. (The Senate version would require a five-year payout period for any inherited IRA over $450,000.) The bill would exempt inheriting spouses and minor children from the provision. It seems to be lost upon Congress that the tax increases will impact the middle class much more than the wealthy.

Another alarming part of the bill, included in response to heavy lobbying from the insurance industry, creates a safe harbor for annuities inside 401(k) plans. You read that correctly. Companies choosing to offer annuities would be shielded from liability no matter how terrible an investment the annuity products may be. This provision has great potential for harm.

The bill will also require all defined contribution plans, including 401(k)s, to estimate how much income would be generated by each participant’s current account value. How that estimate would be calculated is not specified. Questions about how to predict returns—and whether accurate estimates are even possible—could keep experts debating for years.

The SECURE Act does have some small positive provisions. Those who work past age 70 could continue making IRA contributions while they’re earning an income. The start date to take required minimum distributions from IRAs or 401(k) plans would change from age 70 1/2 to age 72 (age 75 in the Senate version). The bill would also expand the ability of small businesses to reduce costs by joining together to create 401(k) plans.

Another change is a $500 tax credit to smaller employers who encourage automatic enrollment in their retirement plans. Research shows that workers save more under automatic enrollment than when they have to affirmatively opt in. The contribution amount that workers could have automatically deducted from their paychecks would also increase from 10% to 15%. Penalty-free early IRA withdrawals up to $5,000 would also be allowed for plan owners upon the birth or adoption of a child.

The good news in the SECURE Act is sparse at best. Relatively few people will want to work and make IRA contributions after age 70. Raising the age for required distributions is also minor. Making it easier for companies to set up retirement plans easier is a plus, except that so many already have plans in place.

The negatives, however, are enough to support defeating the bill. Yet a defeat is highly unlikely. Lawmakers are apparently satisfied with the increased revenue—both to the Treasury from taxes and to their reelection campaigns from happy insurance companies.

It is ironic that, amid the current partisan drama in Congress, when a piece of bipartisan legislation does get done, it’s uniformly bad for the very middle-class Americans that politicians of both parties claim to support.

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8 Responses to The SECURE Act and Your Retirement Accounts

  1. Bill Bengen June 24, 2019 at 3:11 pm #

    Rick, this is truly alarming. Thanks for the heads-up. I wonder if those currently withdrawing from IRA accounts will be grandfathered out of the ten-year period? This could have radical planning consequences, particularly for new retirees/ What’s next? Reducing SS benefits?
    Best regards, Bill Bengen

    • Rick Kahler July 2, 2019 at 11:34 am #

      Bill,
      They already did reduce Social Security strategy known as ‛start, stop, start’ was scaled down for individuals, and eliminated for married couples, following the Bipartisan Budget Act of 2015. This passed with strong bipartisan support and was signed into law by Obama. It was terrible for the middle class and flew under the media’s radar, just like this bill is doing.

  2. Ken July 2, 2019 at 10:45 am #

    Best to start doing Roth conversions

    • Rick Kahler July 2, 2019 at 11:30 am #

      This would be especially true if the parent is in a lower tax bracket than the children. The kids still must collapse the Roth within 5 years and lose the tax free compounding, but of course they pay no taxes.

  3. Ken July 8, 2019 at 12:19 pm #

    James Lange told me to convert up to the max of the 24% bracket
    We will never see rates this low

  4. Johnna C. August 27, 2019 at 6:47 pm #

    Annuities in IRA or 401k are best when used, not as an Investment but rather as insurance (meaning leverage to optimize the income that MUST come out (RMD Optimization) through the use of a withdrawal benefit. The use of pooling risk allows a much larger cash flow off less dollars , this allows the insurance annuity to do most of the heavy lifting of the RMD each year allowing the rest of the IRA dollars to grow. Takes the pressure off this portion while also helping to mitigate sequence of return risk. This is just one example.

    • Rick Kahler August 28, 2019 at 11:30 am #

      Johnna,

      I did not specify in the article that my comments were primarily directed toward VA and indexed annuities. Thanks for your comments.

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  1. Rick Kahler: Annuities Do Not Belong In 401(k) Plans | Kahler Financial - August 12, 2019

    […] weeks ago I wrote about the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which will reform various aspects of US retirement laws. The Act was passed by the House in May […]