House Passes SECURE Act 2019: Bill Would Make Big Changes to 401(k) Plans
Category: Financial and taxes in retirement
Updated Dec. 22, 2019 – The SECURE Act was passed by both houses and signed by the President. See: SECURE Act on 401(k)s and IRAs Signed into Law.
May 25, 2019 — The Democratic lead House of Representatives passed a bill this week, the Secure Act of 2019, that would make major changes to 401(k) plans. If it goes into law those changes could have a very positive effect on retirees and people who hope to retire someday. Since neither the Senate nor Pres. Trump seem to have any major objections, the bill seems to have a very good chance of becoming a reality.
The law has come into being as a reaction to a number of factors including a recognition of the growing importance of 401(k) plans, as well as the increasing longevity of Americans dependent on those plans for their financial security. Here are some of the many changes in the Secure Act of 2019, which passed by a whopping 417-3 margin:
- Required Minimum Distributions (RMDs) not required until age 72 (currently required at age 70 and 1/2)
- Granting companies with 401k plans permission to offer annuities as an investment option
- Employers must disclose on 401(k) statements the amount of sustainable monthly income the employee’s balance would support
- Part time workers would be allowed to participate in 401(k) plans
- Unaffiliated companies could band together to offer 401(k) plans
To help pay for the lost tax revenue that might come from these changes, the bill would change the tax treatment for people who inherit 401(k)s. If it goes into law, the inheritors would have to cash out the plan within 10 years and pay appropriate taxes. Surviving spouses and minor children are exempt.
What this might mean for you
As we mentioned earlier, this bill which addresses needed changes to retirement plans and our increased lifespans, seems to have very rare bipartisan support. If you are not retired yet, the biggest change might be in having the option to put some of your tax-deferred retirement assets into an annuity at a younger age. If you are retired and your assets are still in the company’s 401(k) program you also might have the annuity option, if the company provides one. Many people like the idea of annuities because they offer the option of a guaranteed payout as opposed to the risks in the stock and bond markets.
Whether you are retired or not you would be able to delay taking required distributions from your plan for an extra year and a half (70 1/2 to 72). That would let your assets accumulate more tax deferred value longer, as well as delaying taxes on your distributions.
Comments: If your 401(k) plan offered an annuity , which guarantees future income, would you invest in it? Also, if an RMD was not required until age 72, would you wait that long before taking out money from your plan? Please let us know in the Comments section below.
Comments on "House Passes SECURE Act 2019: Bill Would Make Big Changes to 401(k) Plans"
Jean says:
Those changes seem reasonable, but why not get rid of the required min distributions entirely?
Barb says:
Yes I would consider investing some funds in an annuity dependent on the annuity plan description.
And I might not wait to take money from the 401(k). Since an annuity is not subject to RMD rules currently, I might take funds from the k plan first to lower the amount of the RMD and save annuity funds for a later withdrawal. However there are other factors to consider pursuant to the rates of return on these investment vehicles as well as whether or not said k plan or annuity would be augmenting a defined benefit pension and/or Social Security income. It would seem wise to consider the entire financial picture prior to developing a strategy regarding withdrawals and timing of such.
LS says:
I don't believe that annuities would be an "investment" option but rather a form of a distribution from the 401k plan. The plan would offer this option, like the Federal Thrift Savings Plan does, when you start taking money out of the plan at retirement or later.
The plan would offer to purchase an annuity for you with an insurance company from some or all of your money in the plan. When doing this, your money is no longer in the plan but transferred to the insurance company who will pay you a monthly benefit, for life or for a defined period, based on your current age and the rate of return the insurance company is earning on its investments at the time.
The Federal TSP has offered this distribution option for many years but last I saw, only around 2% of participants elect this option.
I'm interested in the RMD age change to 72 as I must start taking distributions by April 1 of next year under current law. I would probably elect to defer taking a distribution till age 72 if the law is changed.
MJ says:
I would elect to defer taking RMD until 72 if I had that option.
Greg W says:
The p/t worker and unaffiliated company group program is excellent for most working folks, though doesn’t impact me (retired last year at 58). Those two aspects alone make the legislation a full-on win for the country’s future retirees.
I need more details on the tax impacts to those inheriting 401k assets before saying how hard it could hit my heirs. The annuity options don’t fit my needs, as I’ve diversified my retirement income already for risk, and won’t sacrifice the growth potential in my 401k investments. Raising RMD age is good, but I have time to plan my tax strategies around whatever age it is.
This legislation is an example of something that should have been proposed years ago, but for the wingnuts that we’ve elected on both sides of the aisle. The political middle has so much potential for good, but collaboration doesn’t win elections so we’re stuck with the paranoid schizophrenic Legislative and Executive branches we created.
Partagas says:
Jean, I Iike the way you think, but I think the answer to your question as to why have RMDs at all is that the government wants access to your retirement savings so they can tax it. After all, the government has generously allowed you to keep your own money and any returns (heaven forbid!), and they can only allow that to go on for so long before they demand to get their hands on a chunk of it. While I certainly will be glad to postpone RMDs, it’s not like 18 months is a huge extension. It seems like the government could at least do something to mitigate the impact of RMDs, for example after you take an RMD from a traditional IRA/401/403 and pay taxes on it, allow you to put all or a portion of the remainder into a Roth IRA. But again, that would mean that any gains earned on that money would not get taxed. The answer to most questions involving government can be answered with “follow the money”.
Linda says:
This would not affect me as I am already retired and already required to take the RMD. I would have appreciated the delayed option. And no. I would not have purchased an annuity if that were an option.
It seems like a reasonable piece of legislation.
Shumidog says:
Does this legislation reduce the amount of RMD required? It would be nice if it did.
jean says:
Partagas, Yup, I know they just want the taxes on that money. It would be nice to take away the RMD so we could leave it to pay for long term care if it's ever needed.
Emily Seiler says:
I would like them to change the law that when you start taking withdrawals from your retirements accounts, you have to pay more for Part B Medicare if it increases your income enough. I can understand paying more if you have a big income from a pension, but not using your own savings against you to charge more.
Yes, I would delay taking RMD if the age is changed, although it may be smart to make some withdrawals now since taxes are so low. I'd like to find out more about rolling a non-Roth TSP account into a Roth with a mutual fund company. Especially since the TSP withdrawals will be changing this fall.
Vicki says:
An annuity doesn't sound like a good option to me, but at least it's another option. I agree with Shumidog - they should reduce the percentage of the RMD required. More than 3% withdrawal way to soon. I'm not that age age but once retire do plan to withdraw 3%, just to get the account a little lower for RMD/tax purposes.