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Hey, Congress is Actually Working!
Well, somewhat. If you are like me watching the news, you are wondering if Congress is getting anything done lately. But, despite the appearance, they are actually working some lately. The House just recently passed H.R. 1994 on May 23rd. This is the SECURE Act of 2019, which proposed many changes to retirement plans and accounts, some of which may affect you as an individual investor and/or small business owner. At the time of this writing, it is with the Senate for review. Therefore, we want to take a few minutes to cover the highlights of the act.
For individuals, and more specifically retired individuals, the two most intriguing changes are the repeal of the maximum age for traditional IRA contributions and the increase in the age when required minimum distributions (RMDs) begin.
Increased Maximum Age For IRA Contributions The SECURE Act removes the max age for IRA contributions. Currently, a person can no longer contribute to a traditional IRA after age 70 ½. If passed, then individuals will be able to continue to contribute to an IRA – within IRS limitations regarding the amount and so long as the individual has enough earned income during the year. This can be beneficial for people that are delaying retirement until after age 70, as it allows for them to continue to save.
Increase in Age When RMDs Begin The Act also delays the start of RMDs from 70 ½ to 72, which is a reflection of longer life expectancies. RMDs are the minimum amount that an IRS holder must pull out of his/her IRAs within a given year. That amount is a calculation that is based on the person’s life expectancy. With individuals living longer nowadays, this change would allow accounts to remain funded a little longer in retirement.
Expansion of Section 529 Plans The legislation also makes changes to 529 plans (college savings plans). In general, 529 plans are designated for post-secondary education expenses. The act expands 529 accounts to cover costs associated with certain apprenticeships, homeschooling, and qualified student loan repayment (within limits).
Expansion of Penalty-Free Withdrawals From Retirement Plans For individuals that participate in a company retirement plan such as a 401k or 403b (among other plans), you cannot access monies in your account unless you are 59 ½, separate from service, borrow from the plan (if allowed), or qualify for one of the IRS exceptions to the 10% penalty. The SECURE Act proposes an addition to the list of exceptions to include distributions to cover qualified birth or adoption expenses.
This is not in any way a complete recap of the Act, as I have only highlighted a few that I feel most clients of Holmes & Griffeth will be affected by. And, small business owners with a qualified retirement plan (401k, 403b, etc.) will need to read much deeper into the legislation for changes that may affect them and/or their plan participants.
Now, like I mentioned earlier, this is approved by the House (by a 417-3 vote), and is currently being considered by the Senate. Leading up to this, the Senate was already working on their own version of the legislation. So, most likely, we will see something approved shortly, but it may include some aspects of each Chamber’s legislation. We will keep you posted on any final legislation that gets finalized.