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The Biggest Changes To The U.S. Retirement System In 10 Years

This hasn’t become law yet, but in a sweeping house bill known as SECURE (Setting Every Community Up For Retirement), new legislation is coming that will be the most sweeping changes we have ever had to our retirement system in more than a decade.  The house passed the vote recently 417-3, and it doesn’t look like there is much impeding the process from the Senate or even President Trump.  So, what do these changes mean to your wallet?

Annuities May Hit Your 401(k) Soon

Over the past 25 years, we’ve seen pensions offered by companies dwindle down to a microscopic level.   While more and more baby boomers and Gen X’ers worry about saving enough for retirement, there is no real great option in 401(k)’s to guarantee someone a lifetime income.  Target funds were designed to help make it easier to choose simple investments in your 401(k), but this legislation would now allow 401(k) providers to offer an annuity as an option to choose within your 401(k).   Annuities have been villainized by the media over the past 25 years as a product that charges too much in fees to clients and not enough to justify the cost of the product.  But now with this legislation, you’ll be able to see exactly how much income your 401(k) will provide you at retirement and choose whether or not you want guaranteed income.

Required Minimum Distributions Are Getting An Age Hike

We are living longer, and the retirement rules are going to change with required minimum distributions for your qualified retirement plans (i.e. IRA’s).  If the legislation passes to become law, the official age for RMD’s will be 72.   This gives individuals another year and a half to start taking money out of their retirement accounts.  You’ll still have a pretty onerous penalty if you fail to take a required minimum distribution, but now you can wait longer. 

Watch Out For Inherited IRA’s

To help pay for this bill, it would require many people who inherit an IRA or a 401(k) plan to withdraw the money over 10 years and pay any tax due at their ordinary income rates.  Under today’s rules, any heir named as the account’s beneficiary can withdraw the money during their life expectancy, which has historically been called a “stretch IRA”.  The new 10-year deadline wouldn’t apply to some heirs including the owner’s surviving spouse or minor children.

Also, it has been bandied about that if there is more than $400,000 in the account that is inherited, the 10-year deadline would shrink to a 5-year deadline, accelerating the amount of tax coming out of the account on a quicker basis.  You’ll need to be really careful about how you plan for your IRA beneficiaries going forward if this passes into law, and be thoughtful about your tax planning if you inherit an IRA.

Student Debt From Your 529’s

With this new bill, parents will be able to take out as much as $10,000 on a tax-free basis to help pay down student debt.  With student debt mounting at more than 1.5 trillion dollars, this could be another way for parents or grandparents to help out their children.

More People Can Get In On Having A 401(k)

Under the new legislation, long time part time workers will be eligible to participate in a 401(k) plan, when they are often excluded from most plans.  Any employees that have worked at least 3 years part time and 500 hours a year will be able to participate in the plan.  The bill would increase the tax credit employers can claim when they start up a retirement plan, from $500 to as much as $5,000 a year for three years. They would get an extra $500 a year for three years if they automatically enroll employees, unless they opt out.

There are more nuances to the legislation and likely a few more tweaks before it makes its way through the senate.  However, this could be some of the most sweeping bipartisan legislation to happen to our retirement system for years.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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