Bill aims to boost retirement savings
Proposed legislation that Congress could approve at the end of this year is expected to encourage people to save more for retirement amid concerns about the survival of savings. He has
bipartisan support, but it is broad and not without its complexities.
Federal lawmakers are working on bills, collectively known as Secure Act 2.0, to build on the initial law approved in late 2019.
Ben Ronning, director of financial planning for Rogers-based Arvest Wealth Management, said the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 has arguably brought the most change to retirement since the 2006 law. on pension protection. required the minimum age for distribution to be 72, removed the age limit for making contributions to traditional IRAs, and eliminated the expandable IRA for most non-spouse beneficiaries.
Like the SECURE Act, the proposed legislation should help people prepare for retirement, said Robert Spears, director of advanced planning and wealth management adviser for Arvest Wealth Management.
“It’s multiple pieces of legislation under one umbrella,” Spears said. “The main umbrella is directly related to the belief system that there is a lack of preparation for retirement.”
He cited reports showing that people are not saving enough and could outlive their savings for an average of eight to 20 years. On average, US investors have about $141,542 saved for retirement. Among the 30 million investors, the median 401(k) plan balance is $35,345.
“That means half of the account balances are below that amount and the other half are above,” he explained. “The median account balance is considered more representative of what most people have saved in 401(k) accounts.”
The bill would gradually raise the required minimum distribution age to 75 by 2032, allow part-time workers to enroll more quickly in employer-sponsored pension plans, and require employers to automatically enroll new employees to the plans. Employees can opt out, but those enrolled in it would gradually increase their contributions until they reach 10% of earnings. He also noted that the legislation would allow investors approaching retirement age to invest more money in plans.
Spears said investors aged 62 to 64 could contribute an additional $10,000 per year to their 401(k) or 403(b) plans or an additional $5,000 per year to a simple IRA plan, starting at 6,500 $ and $3,000, respectively, under applicable law. .
Eric Krause, managing director of the Fayetteville firm for Prime Capital Investment Advisors, said the change in the required minimum distribution age would help investors who don’t want to start taking money out of 401(k) and IRA plans. .
Krause noted that part-time employees would be eligible to enroll in employer-sponsored 401(k) plans if they worked 500 hours for two consecutive years instead of three consecutive years under current law.
He added that the legislation would also create a national database to enable investors to track down lost projects or those they may have left behind with former employers.
Ronning said the legislation would clarify post-debt distribution rules. Retirement accounts have unnamed beneficiaries, such as charities, estates, or non-living things. Still, he said the legislation clarified designated beneficiaries (persons), including eligible and non-eligible designated beneficiaries. Precedents include surviving spouse, disabled or chronically ill, children under 21, and one under 10 years younger than the deceased account holder. Ineligible designated beneficiaries would be those who do not meet the criteria listed above.
Under the bill, when a beneficiary turns 21, they would change from an eligible designated beneficiary to an ineligible designated beneficiary, Ronning said. This would trigger the 10-year rule, requiring beneficiaries to exhaust the inherited account in 10 years.
He said that in some cases, beneficiaries could opt out of the Extended IRA and enter the 10-year rule if they did so before being required to start receiving the required minimum distributions. He said it could help someone looking to get financial help for themselves or their children.
IMPACTS ON THE EMPLOYER
Regarding employer-sponsored plans, he said custodians of retirement accounts could limit distribution options for beneficiaries. For example, they could require beneficiaries to take the stretched IRA or be subject to the 10-year rule. The latter might be more favorable to large employer pension plans because they might not want to deal with multiple beneficiaries, he said. If that were to happen, he might suggest that a client have the retirement account transferred to an IRA.
Clay Kendall, managing partner at WealthPath Investment Advisors at Rogers, said the proposed legislation could reduce administrative costs of employer pension plans for small businesses and stressed the importance of automatic enrollment in government-sponsored plans. employer.
“I think this will have a significant impact on Americans’ savings,” Kendall said. “For several years, we have encouraged the employers we work with to consider automatic enrollment, and many of them have done so. This increases participation because instead of the employee having to take steps to enroll in the plan and start saving, it automatically does it for them. And if they don’t want to do it, they have to act.
Kendall said that among WealthPath customers who offer auto-enrollment, most employees haven’t opted out.
Another aspect of the proposed legislation includes higher tax credits for companies that want to start a retirement plan. He said the credits could cover up to 100% of the cost of the plan, with a cap of $1,000 per employee.
In addition, the bill would simplify the notices that employers must send on certain aspects of the plans. He said it would reduce costs and the burden on employers.
Kendall said customers have expressed interest in another aspect of the bill allowing employees to use the employer contribution to pay off student debt instead of going into the employee’s retirement account.
Additionally, employer-sponsored 401(k) plans could be annuitized even if the employee no longer worked for the employer. Annuities provide investors with income for the life of the plan.
To help employees prepare for emergencies, they could use up to 3% of their income or up to $2,500 in after-tax contributions from their emergency savings plans. He said it would not be taxed or subject to penalties because it would be after-tax dollars.
“I think it would have an impact because a lot of people are dragging their feet to start saving for their employer’s retirement plan because they don’t have enough savings,” Kendall said. “If they have that option where they have cash without penalties, there are a lot more people who are more likely to start participating in their employer’s plan as soon as possible.”
Krause said the sister version of the proposed Senate bill would allow investors under age 59.5 to withdraw up to $1,000 from their emergency retirement accounts without 10% tax penalties for early withdrawals.
“He recognizes that people sometimes find themselves in a tight spot and may not have emergency funds outside of their 401(k),” Krause said.
Kendall also said the proposed legislation would increase the number of people eligible for savings credit for low-to-middle income households. The credit would be set at 50%.
“It’s something that isn’t as well known to a lot of people,” he said. “It should be implemented from 2027. There are probably a lot of people who participate in a pension plan who do not take advantage of the tax credit for savers.”
Ronning said beneficiaries can better plan for taking distributions out of an account before they have to start collecting them. But at or after the time they must start taking them, they are subject to the 10-year rule and taking the minimum distributions required before the SECURE Act is approved.
“It doesn’t matter what – in those 10 years you have to withdraw money, so they’re layered,” Ronning said, noting that’s included in the bill. “The intention was to simplify things, but as it stands it seems more complicated.”
Ronning said he hoped the IRS would consider this unreasonable. Still, he said, if you take it from the perspective of the IRS, it makes sense as a way to generate needed tax revenue. While hoping for the best, he foresees the worst and offers to work with an advisor to avoid unpleasant surprises.
“Everyone’s situation is a little different,” Ronning said. “But you want to apply this vast proposed legislation…in the context of a financial plan for each of them. If you’re a client, you want to talk to your advisor about developing a plan.
He noted that Roth 401(k) plans would have always required minimum distributions, but Roth IRA plans would not. However, Roth IRA plans are subject to the 10-year rule, requiring the account to be depleted 10 years after the death of the account holder.
Ronning and other advisers don’t see why lawmakers wouldn’t approve the bill, and that it would likely be approved after the November election, the same way the original law was approved.