Financial Insights

House Passes Bill Making Big Changes to U.S. Retirement System

A follow up to our report last week regarding the possible end to the Stretch IRA strategy.

Americans could see the most significant changes in more than a decade to their retirement plans under legislation the House of Representatives passed last Thursday.  As life expectancy rises, policymakers and employers are realizing that 401(k) plans, the benchmark retirement vehicle offered by America’s employers for decades, could do more to help retirees make that money last.  The House Bill passed by an overwhelming House majority and expected to be taken up by the Senate before it heads to President Trump’s desk.

A summary of potential changes;

  1. 401(k)-type plans to offer annuities, a type of insurance contract that guarantees a monthly income stream as long as a retiree lives.
  2. Repeal the age cap for contributing to traditional individual retirement accounts, currently, 70½,
  3. Increase the age at which savers must start taking withdrawals from 401(k)s and IRAs to 72 from 70½.
  4. For parents, the legislation allows withdrawals of as much as $10,000 from 529 education-savings plans for repayments of some student loans. In addition, parents could take penalty-free distributions from retirement accounts of as much as $5,000 within a year of the birth or adoption of a child to cover expenses.
  5. Those who would inherit tax-advantaged retirement accounts after the end of this year to withdraw the money over a shorter time frame than many are currently allowed—specifically, they would have to drain the accounts within a decade and pay any taxes due.   Currently, beneficiaries can often liquidate those accounts over their own lifetimes and stretch out tax payments, a technique known as the “Stretch IRA”.

If passed in the Senate, the changes would be the most significant to retirement plans since 2006, when Congress made it easier for employers to enroll workers automatically in 401(k)-type plans and invest their money in funds that shift from stocks to bonds as people age.

Congress may take up other retirement-related proposals later this year. One bill, proposed recently would give employers incentives to double the standard minimum default contribution rate under automatic enrollment to 6%. It would also permit employers to make matching contributions to the 401(k) accounts of employees paying off student loans who don’t contribute enough to the 401(k) plan to receive a full match.

Excerpts from May 23rd Wall Street Journal Article

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