In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, however, has since stalled, leaving many advisers wondering if the Act’s numerous retirement provisions will ever become a reality. First, we will offer a brief update on the current status of the legislation followed by a review of one of the most controversial provisions of the SECURE Act—the future of the Stretch IRA.
Given the many popular provisions of the SECURE Act, including multiple employer pension (MEP) reform and safe harbor provisions for guaranteed income solutions inside of Defined Contribution plans, there is little doubt the legislation will pass the Senate. In order for a final vote to happen, however, the legislation first needs to be brought to the floor. These procedural requirements are where things begin to get complicated. Senate leader Mitch McConnell (R-Ky.) has been reluctant to bring legislation to the floor passed by the House of Representatives in an effort to stymie the Democratic agenda. Also, a few key Senators including Ted Cruz (R-Texas) and Pat Toomey (R-Pa.) are holding out over provisions tucked into the SECURE ACT related to 529 college saving plans and taxation of benefits received by Gold Star families. Of course, neither of these provisions have anything to do with retirement planning.
So, what does this uncertainty in the Senate mean for advisers? At this point, it is still too early to make any substantive recommendations regarding client financial plans, but familiarizing clients with the potential changes is still a best practice. The reasons are: clients will be better prepared to reassess their finances if the legislation does become law, and reviewing these provisions is the perfect opportunity for advisers to showcase their expertise. Regarding the Stretch IRA provision, the three key items advisers need to know are:
- New 10-year period for non-spouse beneficiaries. Under the SECURE Act, rather than having their annual distributions based on their single life expectancy, non-spouse beneficiaries would have 10 years to draw down an inherited IRA.
- Existing stretch IRAs are grandfathered. The new rules would only apply to IRA owners who pass away after December 31, 2019. In other words, existing Stretch IRAs will be grandfathered.
- There are exceptions to the new rules. The SECURE Act will provide relief from the regulations outlined above to beneficiaries who are minors, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. Further, spousal beneficiaries will still be eligible to take annual distributions based upon their single life expectancy—a handy provision for spouses under age 59½ who may need income.
With Congress returning from August recess, attention will again shift to Washington. Advisers are encouraged to closely monitor developments regarding the SECURE Act, and to keep clients informed.
The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional adviser. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.
Matt Sommer is senior managing director, retirement strategy group at Janus Henderson Investors. In this role, he leads the defined contribution and wealth adviser services team. His expertise covers a number of areas, including regulatory and legislative trends, practitioner best practices and financial and retirement planning strategies for high-net-worth clients.