It is estimated that as many as three-quarters of Americans have insufficient retirement savings and a full quarter may have no retirement savings at all. And, given that the majority of workers receive none of the pension benefits that had been common among prior generations, many Americans are left to either continue working longer than intended, or to survive solely or primarily on Social Security payments.
When one considers the average Social Security payment is only about 29% above the Federal Poverty Level, it should come as no surprise that many American seniors are finding themselves in poverty for the first time in their lives.
Enter the SECURE Act, which passed in the U.S. House of Representatives in May of this year. The Setting Every Community Up for Retirement Enhancement Act – which has bipartisan support, and passed the House nearly unanimously – now awaits a vote from the U.S. Senate. While it is not clear if this bill will get attention during the remainder of this legislative year, many industry leaders are hopeful for a 2020 passage. While the bill is unlikely to solve the problem, industry leaders largely agree that it is a step in the right direction and will provide some measure of improvement to a complex and looming problem.
A primary goal of the act is to expand access to employer-provided 401(k) savings plans. The act intends to make it easier for smaller businesses to offer retirement savings plans to their employees through several avenues, including offering a new tax credit to help defray startup costs for new plans, and increasing credit limitations for plan startup costs in order to make it more affordable. The Act would also change safe harbor provisions to make annuities a more realistic investment offering within plans thereby widening investment choices, and allow certain part-time employees to participate in employer-sponsored plans in order to open up plans to more employees.
The act also aims to provide employees with more opportunities for long-term savings. If enacted, employees would be allowed to save into an individual retirement account indefinitely and would not have to take required minimum distributions until age 72. Currently, contributions must stop and required minimum withdrawals must start at age 70½. This change would allow employees to keep funds invested for an additional 18 months beyond current liability and they could continue to save should they opt to delay retirement.
The SECURE Act has a few other interesting provisions. It expands the scope of permissible early withdrawals. Currently, a plan participant will generally have to pay a 10% penalty for withdrawing funds before age 59½. There are limited exceptions now, for reasons such as disability, large medical expenses, a home purchase, or higher education expenses.
But the SECURE Act would also allow parents to withdraw up to $5,000 from retirement accounts without penalty to be used for certain qualified expenses related to birth or adoption. The act would also change the way that inherited IRAs are paid out. Currently, non-spouse beneficiaries – such as children – are able to take from an inherited IRA required minimum distributions over the beneficiary’s expected lifetime. Rather than having a faster distribution calendar, this allows the recipient to continue growing the money, tax-advantaged, for a longer period of time. The SECURE Act would remove this option and require monies to be paid out to beneficiaries within 10 years.
Three senators, Ted Cruz, R-Texas, Mike Lee, R-Utah and Pat Toomey, R-Pennsylvania, have expressed concerns with specific provisions of the bill, which may keep it from getting passed by unanimous consent. However, some version of the bill does seem quite likely to pass in 2020, at least. And, this would seem to be some small step in the right direction.
Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.