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Congress' big chance to help workers save for retirement

Breaking down retirement bill SECURE Act

New legislation aimed at helping U.S. workers put money away represents a rare instance of bipartisan consensus in Congress, and could soon become the most significant retirement reform in more than a decade. Here's what the Secure Act -- recently approved in the House of Representatives and possibly to get fast-tracked in the Senate -- would do for employers and retirement savers.

A guaranteed pension paycheck 

Retirement experts have for years advocated adding annuity options that allow 401(k) participants to convert some or all their account balance into a pension-like payout option. According to a survey from the Employee Benefit Research Institute, 80% of participants would consider using some or all their account balance to buy a guaranteed lifetime income option.

The new bill opens the door for this to become a reality by creating a set of guidelines that would give employers a safe harbor to offer lifetime income annuities. Some critics argue that these guidelines are too broad and would allow insurance companies to offer high-cost, low-quality annuities in 401(k) plans.

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401(k) account statements would have to include an estimate of the lifetime income participants can expect to receive based on their current account balance and current level of annual savings.

Multi-employer plans

The bill makes it easier and more economical for smaller employers to offer retirement plans by allowing for the creation of pooled retirement plan providers. These plans can offer features and low-cost funds that typically have been available only to larger retirement plans with greater assets and thus more purchasing power. The bill also offers tax credits to small employers to join a pool and offer these plans, but it's not clear yet exactly how that would work.

Changes to required distributions

Currently, retirees must begin taking taxable withdrawals from their IRAs and retirement accounts no later than age 70½. This half-year requirement is confusing for many, so the new bill raises the age to 72. It also gives workers more time to keep contributing to their retirement account by removing the age 70½ cap when contributing to an IRA.

Accessing retirement funds to start a family

The bill allows new parents to withdraw up to $5,000 from a retirement account to cover certain expenses related to a newborn or adoption. These withdrawals would be taxed but wouldn't trigger the 10% early-withdrawal penalty.

No more "stretch option"

The legislation also changes the amount of time beneficiaries must draw down inherited retirement accounts. Currently, beneficiaries who inherit a retirement plan or IRA can take withdrawals from these assets over their lifetimes, creating the so-called stretch IRA option, which is advantageous because beneficiaries can delay taxation for a longer period. The new bill sets this time limit to no more than 10 years and takes away the stretch IRA option.

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