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What is the Secure Act, and why do I care?

October 15, 2019
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The House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act on May 23, 2019. It passed by a large margin 417/3 and but has been stalled at the Senate level. The proposed bill has more than 20 provisions and if passed by the Senate and signed by the president, its impact could shift retirement savings and planning. I’ll be focusing on just two provisions:

  • Increase in Age for Required Beginning Date for Mandatory Distributions
  • Modifications to Required Minimum Distribution Rules

Likely these provisions will impact all retirees in some manner.

Increase in Age for Required Beginning Date for Mandatory Distributions

Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, the age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The bill increases the required minimum distribution age from 70 ½ to 72.

This provision will allow the participant to delay beginning withdraws an additional 1 ½ years. Otherwise, not a huge impact.

Modifications to Required Minimum Distribution Rules

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

The Stretch IRA would be eliminated and replaced with a 10-year payout for all beneficiaries, except “Eligible Designated Beneficiaries.” This is a new group that includes:

  • Surviving Spouse
  • Minor Children (but not grandchildren) up to majority
  • Disabled Individuals – subject to strict IRS standard
  • Chronically Ill
  • Beneficiary not more than 10 years younger than the IRA owner (or plan employee)

There will not be any annual RMDs. The only RMD on an inherited IRA would be the balance at the end of the 10 years after death. The entire account balance would be the RMD.

As the bill continues to make its way through the Senate, many believe additional amendments will be made. As we gain clarity we will provide insights for planning. Should you wish for additional reading, the link below is a PDF of the Act.

https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf

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