Executive Order on Retirement Savings a Win-Win
On Fri Aug 31, 2018, President Trump signed an executive order to review the Retirement Enhancement and Savings act of 2018 (RESA). The bill, originally proposed in 2016, was introduced to the Senate in March 2018. The aim of the Act, referred to as Tax Reform 2.0 is to allow retirement money to be spread out over a longer period and make 401(k) plans more accessible to small businesses. Employers will obtain greater freedom in terms of plan administration. In exchange, they will provide more flexibility to employees and better communicate to them all aspects of their retirement savings.
The plan is to overhaul a number of existing rules impeding the growth of deferred compensation and putting a barrier to use of the funds in case of hardship.
- Created one deferred saving vehicle for all needs. Now there are 3, each for a different purpose: 401 for retirement income; 529 for education and HSA for medical spendings. Trump wants to combine one that can be used for all purposes.
- Revoke required minimum distributions after 70 1/2 to let people continue investing
Revocation of required minimum distributions: Win-Win
Seniors will not be required to take the required minimum distribution after the age of 70 1/2. If the septuagenarian has sufficient income for living expenses, they can choose to allow the retirement funds grow. For select taxpayers who choose to exercise this flexibility, greater control of retirement funds is achieved.
The Government also wins. Unused funds inherited by surviving beneficiaries will still be subject to RMD, thus younger working people will pay a higher tax on the distributions than their parents living on a fixed income would have paid.
Ease restrictions on small employers
The Treasury and Labor departments will consider issuing regulations to make it easier for smaller employers to band together to offer 401(k)-type plans for their workers. The arrangement has been available, but only to employers with an affiliation, such as members of the same industry trade association.
Employers to provide defined contribution plan participants with an estimate of the amount of monthly annuity income that their accounts if annuitized, would generate during retirement. The estimate would be included in the participants’ annual plan statements. Defined contribution plan participants will be permitted to make direct trustee-to-trustee transfers (or transfer annuity contracts) that are no longer authorized to be held as investment options under a qualified defined contribution plan.
Pooled fund for deferred savings
The existing system offers three main vehicles, each serving a different purpose. Qualified retirement plans (through employer or IRA) for retirement income; 529 for education expenses; HSA for medical spendings. The plan aims to create a single deferred saving vehicle for all qualifying purposes.