More than 87,000 PERA members have retirement savings in a PERAPlus 401(k) or 457 account. Rules that govern those accounts could soon change. If the bill becomes law, a person could keep money invested longer and take out up to $5,000 upon the arrival of a new child, among other changes.
In May, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was approved by the U.S. House with 99 percent of the vote—an overwhelmingly bipartisan tally. Colorado Rep. Ed Perlmutter was a bill cosponsor, and all seven members of the Colorado congressional delegation—four Democrats and three Republicans—voted in favor of the bill.
After the SECURE Act passed the House, it moved to the Senate. While some expected a quick passage by unanimous consent, opposition from three senators has slowed the bill’s momentum. Sens. Cruz, R-Texas, Toomey, R-Pa., and Lee, R-Utah, all reportedly have concerns about components of the bill. The bill could still pass with a majority vote, but it would require a lengthier process.
In October, seven Republican Senators, including Colorado Sen. Cory Gardner, wrote a letter to McConnell, in which they urged passage of the bill.
What the SECURE Act does
Increase access to retirement plans
About one third of U.S. workers do not have access to workplace retirement plans, like a 401(k) or defined benefit (pension) plan. The SECURE Act seeks to expand access to retirement accounts, making it easier and more affordable for businesses, particularly small businesses, to offer retirement plans. Every Colorado PERA member already has the opportunity to have both a defined benefit plan and a 401(k).
Raise the Required Minimum Distribution age to 72
The advantage to saving money in a qualified retirement plan, like a 401(k), boils down to two tax benefits: Contributions made to these accounts are made with pretax deductions from a person’s paycheck, and profits from the sale of investments in these accounts are not subject to the capital gains tax. Distributions from these accounts in retirement are taxed as ordinary income. Currently, retirees are required to begin taking distributions from these account no later than age 70.5, a rule known as Required Minimum Distribution (RMD). The SECURE Act would raise the RMD age to 72, giving retirees a few more years of tax-free growth. (You can find RMD calculators like this online).
The SECURE Act also would alter the following:
- Parents could withdraw up to $5,000 from retirement accounts within the first year of giving birth or adopting a child.
- Currently, a person can make contributions to an IRA until they reach the age of 70.5. The Act would remove this age cap.
- Say you retire with a 401(k) balance of $175,000. Understanding how much you can expect to be able to spend per month without depleting the account can be difficult. The Act would require providers of defined contribution accounts to demonstrate how an account balance might translate to monthly lifetime income through the purchase of an annuity or similar product.
- An IRA accountholder can designate a beneficiary—a person who receives the IRA upon the accountholder’s death. Currently, the beneficiary is able to spread out tax-free distributions over his or her lifetime while taking advantage of continued tax-free growth. The bill would limit the amount of time a beneficiary has to withdraw all funds from the IRA to 10 years. A beneficiary who is the spouse of the original IRA accountholder would be exempt from this rule.