An effective retirement plan is one that not only needs to be developed and laid out on paper (or computer) but frequently reanalyzed to react accordingly to instances that may be in or out of our power. In Congress, three pending bills may alter the retirement savings and distribution system, as we know it. The objectives are to improve the flexibility of retirement savings, to fix the financial health of social security, and to provide additional protection to pension receivers. There are many benefits and some disadvantages that will negatively affect the small business owners, the average workers, and their beneficiaries.
It is essential to keep track of the progress of the bills. That way, you will have enough time to make necessary changes to adjust your retirement income in your plans and to see what your expected retirement date and savings will be with any of those changes. They also may be revised tax and estate planning for beneficiaries of retirement plans that are is not the spouse.
Setting Every Community Up for Retirement Enhancement Act
The primary goal of this tax legislation is to increase the access of the account holder to their own retirement savings accounts. Below are some of the main points to the act.
For the retirees: for minimum withdrawals required by law from your IRAs,401(k),403(b), and other employer-sponsored retirement plans, the age of when this goes into effect will be changed from 70 and a half to age 72. If you don’t need the extra income, this can be beneficial. It also encourages tax-efficiency strategies during the income years where they are the lowest. Think about making Roth IRA conversions, taking those funds to pay for life insurance, and seeking planned charitable opportunities during this 1 1/2 year stretch.
For the employees: It will enable401(k) program participants to have access to annuities and other lifetime income choices. This can be beneficial during this day and age, where employer-provided pensions are trending towards vanishing, leading to the demand to build your pension. Another reform would require eligible contributions over the age of 70 1/2 to retirement accounts. Traditional IRAs will be like Roth IRAs without an age limit. Certain IRS criteria must be fulfilled and remain constant at this point in order to allow eligible contributions.
For the employers: some of the expanded policies would also cost owners of the business. To maintain compliance with federal and state regulations, they will have to provide additional matching contributions and will have expenditures on revising documents.
Higher tax credits should be available up to 50 percent of the new retirement package for a small business. It rises from a maximum tax credit of $500 per year to $5,000.
For the beneficiaries: The law created a significant change that limits the capacity of inheriting a stretch for beneficiaries, which can be detrimental in regards to estate planning. A non-spousal beneficiary will have a 10-year limitation period to delay dividends and income taxes in regards to an inherited IRA. It will require taxation of retirement plans inherited in the first year or no more than a decade. There are exemptions for the impaired, a minor, or chronically ill that are non-spousal beneficiaries.
Distributions would occur during the course of their life expectancy for those with exemptions. Still, the exception for minors would terminate when they reach adulthood with the final payout to be collected within a decade.
Spousal recipients will still be able to extend and postpone the required minimum distributions of the inherited account until the completion of the deceased’s 72nd year. Before this new law proposal, the delay was up until 70 and a half years of age.
Social Security 2100 Act
Rep. Larson, D-Conn., presented this bill this year in July. The purpose of this tax act is to address the Social Security program’s solvency so that it can still be functional by the end of this century. If nothing is done about it, Social Security trust funds are estimated to be bankrupt by 2035. If this occurs, 80% of the current benefits are what will be paid out. This would adversely affect citizen’s retirement income for a lifetime, most of whom depend exclusively or partly on benefits from Social Security to fund their retirement.
For the employees and employers: In order to pay the solvency fix, the bill will be increasing payroll taxes. Both workers and employers must pay higher social security taxes. The rates of social security currently paid by a worker and equivalently paid by an employer can be about 6.2 percent for an annual salary of $132,900. The plan is to increase the tax by 1.2 percent more for a total of 7.4 percent for up to the maximum yearly wage of 400k. For example, if a worker earns $250,000 in income, their SS taxes will be increased by $10,260 a year.
The expenditure of the company would grow by the same amount. The added cost is going to probably result in lower-wage hikes and reduced employee contributions to their retirement plan.
For the recipients of Social Security: People currently receiving benefits from Social Security may expect a decrease in federal taxes on their earnings from Social Security. Taxation on up to 85% of Social Security benefits occurs if non-Social Security earnings are above $25,000 for singles and $32,000 for spouses. Under this proposed bill, the amounts will rise to $50,000 for singles and $100k for spouses.
Rehabilitation for Multi-Employer Pensions Act
A majority of 264-169 passed this bill at the House of Representatives in July of 2019. The aim of this new bill is to enable pension plans to borrow money for sustainability and so that it can continue to pay pensioners, If approved, a trust fund would be created by the new law which lends money to pensions as financial solvency continues to be a problem with a lot of public and private pension plans.
There could be many positive changes for workers, employers, and retirees if any of these three pending bills pass. Workers, small business owners, and beneficiaries must pay the costs of the SECURE Act, Social Security 2100 Act, and Rehabilitation of Multi-Employer Pensions Act. Monitoring the status of these measures and the always-changing tax code will be essential to allow time to plan your personal retirement plan, tax plan, and estate plan.