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Spending Bill Includes Seismic Retirement Changes, Curtails Stretch IRAs

The just-released, 1,773-page, $1.4 trillion 2020 spending bill means many Americans will be rewriting their retirement plans—if the budget gets signed into law before the holidays as expected.  It includes the SECURE Act—Setting Every Community Up for Retirement Enhancement Act of 2019—which passed in the House 417-3 in May but stalled in the Senate. Basically, the whole SECURE Act was brought over, including the “pay for” revenue-raising provisions.

“The most significant piece of retirement legislation in a decade could become a reality, after all,” says Brian Graff, CEO of the American Retirement Association.

The American Council of Life Insurers was quick to send out accolades: “[The SECURE Act] would mark a significant step toward modernizing America’s retirement system for workers.”

What’s in it for life insurers? A fiduciary safe harbor provision that will make it easier for employers to offer retirement plans with lifetime income options through annuities.

Also, there are increased tax incentives for small employers to offer retirement plans in the first place. The bill increases the tax credit for new plans from the current cap of $500 to $5,000, or $5,500 for plans that automatically enroll workers. Rule changes will make multi-employer retirement plans, where two or more employers band together to offer a plan, more workable, too.

The pay-for that will get the most attention in the retirement planning community is the imposition of a ten-year payout rule for beneficiaries of inherited retirement accounts.

Here’s a rundown of some of the major retirement changes in the spending bill.

It would allow part-time workers to participate in 401(k) plans. 401(k) plans typically require employees to work 1,000 hours in a 12-month period to participate in the plan. The new threshold would be 500 hours for three consecutive years. Note: This isn’t mandatory, so it’s in the employers’ court, and it wouldn’t be effective until January 1, 2021.

It would increase the age for required minimum distributions from 70½ to 72. Instead of having to take out annual RMDs from your 401(k) and IRA starting when you turn 70 ½, the minimum age would be 72. This would be a boon to most taxpayers who can afford to delay taking money out (it’s estimated it will cost the Treasury $8.9 billion over the ten-year budget window).

It would eliminate the prohibition on traditional IRA contributions for those age 70½. So older workers would be able to save on a pretax basis and boost their retirement kitties. This is importan, given that folks are working longer and facing increasing longevity.

It would allow penalty-free retirement plan withdrawals for new parents. Within a year after a birth or adoption, new parents could take up to $5,000 from a 401(k) or IRA or other qualified retirement plan.

It would require inherited IRAs to be depleted within ten years. This is the provision that will pay for virtually everything else—bringing in an estimated $15.7 billion to the Treasury over ten years. It will upend estate planning. Today IRAs can be stretched out over beneficiaries’ lifetimes, providing decades of tax-deferred (or tax-free in the case of Roth IRAs) compounding. Instead, most IRA beneficiaries (not a spouse) would be required to deplete an inherited IRA within ten years, accelerating—and likely increasing—taxes owed and destroying creditor protection for IRAs held in trust. Forbes contributor Leon LaBrecque explains how the 10-year rule could cost your kids here.