Potential tax law changes might be arriving in 2019. This could affect individuals who have Self-Directed IRAs. While there has not been a major overhaul to the tax code since 1986, two U.S. Representatives have introduced—or more accurately “reintroduced” — the Retirement Enhancement and Savings Act (RESA).
The bill is intended to increase access to retirement accounts among small businesses. In its most significant provision, RESA would make it easier for them to open multiple employer plans (MEPs), along with other proposed changes that could require certain sized businesses to offer a retirement plan and alterations to the way Required Minimum Distributions (RMD) and are handled.
Some of the other provisions include allowing a terminated worker with an outstanding 401(k) loan balance to roll over the loan and pay it back without it being considered a taxable distribution and establishing a “safe harbor” for the selection of lifetime income providers for retirement plans.
Here are a few of the highlights of the bill:
Multiple Employer Plans (MEPs) may become a reality
President Trump’s executive order of August 31, 2018, along with the proposed RESA legislation, means that multi-employer plans may finally come to fruition. By spreading out the costs, liabilities, and administrative responsibility among multiple employers, smaller companies could benefit by being able to offer their workers a retirement plan that would not have been available otherwise.
Right now, the law requires that any employers who band together to offer their workers retirement plans must have a connection, such as being in the same industry. RESA would eliminate this requirement and end another provision that puts the entire plan at risk if one of the members of the plan violates the law.
Make 401(k) annuities possible and improve annuity information
Traditional pension plans usually provide an annuity option that creates a lifetime income stream for employees. Most 401(k) plan participants do not have this choice. Under RESA, however, businesses would be afforded protection from lawsuits in case an annuity provider goes out of business or fails to live up to its agreement.
Another provision of RESA would require benefit statements to include lifetime income estimates at least annually. RESA also enhances the portability of these annuities for workers who switch employers. Under the present law, participants can be charged a surrender fee when they change jobs.
Repeal the maximum age for Traditional IRA contributions
This part of the legislation would repeal the prohibition on contributions to a Traditional IRA by an individual who has reached the age of 70½. As Americans continue to live longer, they also stay employed well beyond their traditional retirement age.
Expand tax credits to offset the costs of starting a retirement plan
Businesses that are starting a new retirement plan right now may receive a $500 tax credit. RESA would increase that amount to as much as $5,000 for three years. The credit would apply to new 401(k) and SIMPLE IRA plans. Companies that add automatic enrollment would be eligible for an additional $500 credit for up to three years. Employees would still be allowed to elect not to participate in the plan.
Changes to the required minimum distributions (RMD) rules for Self-Directed IRAs
The legislation would modify the RMD rules as they pertain to defined contribution plans and Self-Directed IRA balances upon the death of the account owner. Under the proposed changes, aggregate account balances that exceed $450,000 are required to be distributed by the end of the fifth calendar year following the year of the employee or Self-Directed IRA owner’s death. Distributions to the following beneficiaries are not included in the rule:
- Spouse of the deceased.
- Disabled or chronically ill individuals.
- Individuals who are not more than ten years younger than the deceased.
- A child of the deceased who has not reached the age of maturity.
Stay in touch with your tax or financial advisor for updates and to determine how these potential changes will affect your situation.