For years, investment professionals have been trying to draw attention to what they believe is a retirement crisis is looming on the horizon. Specifically, there is growing concern among experts that Americans are substantially underfunding their retirement needs. According to the U.S. Bureau of Labor Statistics, only 55% of the adult population actually contributes to a workplace retirement plan (as of 2018). Given the continual deterioration of social security, coupled with significant cost of living increases, this percentage is particularly alarming. In an effort to address this dilemma, Congress recently passed the Setting Every Community Up for Retirement Enhancement Act of 2019. Specifically, the bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.[i] Below is an overview of the legislation’s key components.
- Age at which retirement plan participants must take required minimum distributions (RMDs) is pushed back from 70½ to 72.
- Allows for penalty-free withdrawals of $5K from 401(k) accounts to offset costs of having (or adopting) a child.
- Permits up to $10K annually from 529 accounts to be used for qualified student loan repayment.
- Enables part-time employees who work 1,000 hours throughout the year, or have three consecutive years of 500 hour service, to participate in employer-sponsored retirement plans.
- Provides a $500 tax credit per year to employers include automatic enrollment in their 401(k) or SIMPLE IRA plans.
- Encourages the use of annuities in retirement plans by reducing the liability born to the employer should the insurance company fail to meet its financial obligations.
Lastly, the bill effectively eliminate the “stretch IRA,” which had previously allowed non-spouses inheriting retirement accounts to spread our withdrawals throughout their lifetime. Instead, the new law requires that all proceeds from these accounts be withdrawn within ten years of the original account holder’s death. The primary reason for removing this provision is to provide funding for tax credits and offset anticipated lost tax revenue (due to more people making tax-deferred contributions and RMD starting at age 72).
While we are very pleased to see it become easier for more people to benefit from employer-sponsored retirement plans, we recognize that these changes alone will not prevent a national retirement shortfall. As such, we encourage you to work with your financial advisor to map out a long-term retirement solution that is customized to meet your specific objectives.
[i] Congress.gov. “H.R.1994 – Setting Every Community Up for Retirement Enhancement Act of 2019.” Accessed Dec. 19, 2019.
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