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Retirement Perspectives

The SECURE Act offers new provisions that should help give adults more incentive to boost retirement savings.

One of the most significant pieces retirement legislation since the Pension Protection Act of 2006 was overwhelmingly approved by the U.S. House of Representatives on May 23, 2019. The bill, Setting Every Community Up for Retirement Enhancements (SECURE), was approved with broad bipartisan support by a vote of 417-3. However, the bill must be passed by the Senate and signed by the president before it becomes law.

One of the major provisions in the SECURE Act is to allow long-term part-time workers to participate in 401(k) plans, which experts believe will help boost retirement savings for a larger number of workers. According to a recent study by the Federal Reserve, 25% of non-retired adults have no retirement savings or pension.

Here are some of the provisions affecting employer plans, individual retirement accounts (IRAs), and Section 529 Plans included in the SECURE Act. For a comprehensive overview of the SECURE Act, click here.

  • Traditional IRA contribution allowable at any age – Those taxpayers with earned income could make traditional IRA contributions at any age (age limit is now 70½).
  • Graduate student IRA contributions – Certain stipend, fellowship, and similar payments to graduate students would be deemed earned income for the purposes of making IRA contributions.
  • Expansion of eligible expense categories for Section 529 Plans – Distributions for the apprenticeship program expenses  would be deemed qualified and therefore not subject to taxation and or penalty.
  • Student loan repayment using savings in 529 Plans – tax-free distributions from 529 Plans for qualified student loan payments
  • Delayed required minimum distributions (RMDs) – The age when RMDs must begin would generally be increased from age 70½ to age 72. This provision would apply to IRAs, 401(k), 403(b), and governmental 457(b) plans.
  • New exception to the 10% early distribution penalty – The birth or child adoption would qualify as a distribution event exempt from the 10% early distribution penalty tax for distributions up to $5,000 in aggregate from certain retirement accounts; accounts could subsequently be repaid.
  • Curtailing “stretch” payout to certain beneficiaries – Certain beneficiaries that inherit a retirement account will be required to take post-death distributions at a more rapid payout – no more than 10 years. This provision would apply to beneficiaries of IRAs, qualified defined contribution plans, 403(b), and 457 plans as well.

A few additional key provisions included in the bill will aim to1:

  • Simplify the 401(k) safe harbor rules;
  • Provide portability of lifetime income options; 
  • Allow plans adopting by the filing due date to be treated as in effect as of the close of the year;
  • Provide a fiduciary safe harbor for the selection of a lifetime income provider;
  • Modify the treatment of custodial accounts on termination of 403(b) plans;
  • Require disclosures regarding lifetime income (12 months after guidance from the Labor Department is published); and
  • Modify the nondiscrimination rules to protect longer-service participants.

We will update readers about the SECURE Act as developments occur.

 

1 "House Overwhelmingly Backs SECURE Act; Focus Now Turns to Senate," National Association of Plan Advisors (NAPA), May 23, 2019.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY OF TERMS

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

A 457 plan is available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

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