Our featured article of the month, The SECURE Act and Traditional IRA Changes, is a brief introduction to a law that has not yet passed, but that may have far reaching consequences for many investors and retirees. As stated, the SECURE Act has not cleared the Senate as of yet, however there is a good probability that it will soon. The announced purpose of the act is to address the retirement crisis facing our country. Many individuals are well short of their retirement goals and the fear is that many Americans may never be able to retire. This act proposes some solutions to may help bridge that gap.
One item of interest in the act pertains to the age of Required Minimum Distributions (RMD) for IRAs which is currently 70.5 years old. The act proposes to raise the RMD age to 72 in order to allow workers to contribute to IRAs until age 72. This may help individuals who find themselves working into their 70s by allowing them to save longer. However I think the real benefit lies with retirees who will not be forced to withdraw funds from their IRAs until a bit later. The extra year and half would help defer the taxable income realized as a result of the mandatory RMD requirement.
An even more interesting item in the act pertains to the elimination of stretch IRAs in order to fund the act. The law that passed to allow the stretch option on IRAs has been in place for over a decade and represents a significant benefit to the IRA owner’s legacy and estate plan. The act would limit the stretch option for non-spouse beneficiaries from life expectancy of the beneficiary to just 10 years. This would negatively impact the legacy of the IRA owner whose planning strategy is to leave the IRA as a vehicle for long term tax deferral and structured distribution. The stretch IRA has been a great tool to allow IRA owners to leave an appreciating tax deferred asset to their children and grandchildren that can be easily managed and facilitated. The limitation of such a benefit to just 10 years would represent quite a costly hit to the long term legacy value of many IRA owners.
What is it?
How might it affect retirement strategy?
If you follow national news, you may have heard of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Although the SECURE Act has yet to clear the Senate, it saw broad, bipartisan support in the House of Representatives and could make IRAs a more attractive component of your retirement strategy. However, it also changes the withdrawal rules on inherited “stretch IRAs,” which may impact retirement and estate strategies, nationwide. Let’s dive in and take a closer look. 1
Secure Act Consequences. Currently, those older than 70 ½ must take withdrawals and can no longer contribute to their traditional IRA. This differs from a Roth IRA, which allows contributions at any age, as long as your income is below a certain level: less than $122,000 for single filing households and less than $193,000 for those who are married and jointly file. This can make saving especially difficult for an older worker. However, if the SECURE Act passes the Senate and is signed into law, that cutoff will vanish, allowing workers of any age to continue making contributions to traditional IRAs. 2
The age at which you must take your Required Minimum Distributions (RMDs) would also change. Currently, if you have a traditional IRA, you must start taking the RMD when you reach age 70 ½. Under the new law, you wouldn’t need to start taking the RMD until age 72, increasing the potential to further grow your retirement vehicle. 3
As it stands now, non-spouse beneficiaries of IRAs and retirement plans are required to withdraw the funds from its IRA, tax-sheltered status, but can do so by “stretching” the disbursements over time, even over their entire lifetime. The SECURE Act changes this and makes the use of “stretch” IRAs unlikely. Under the new law, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years max. 4
What’s next? Currently, the SECURE Act has reached the Senate, where it failed to pass by unanimous consent. This means it could move into committee for debate or it could end up attached to the next budget bill, as a way to circumvent further delays. Regardless, if the SECURE Act becomes law, it could change retirement goals for many, making this a great time to talk to a financial professional.
H.R.1994 – Setting Every Community Up for Retirement Enhancement Act of 2019
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – financial-planning.com/articles/house-votes-to-ease-rules-for-rias-correct-trump-tax-law [5/23/19]
2 – irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [6/18/19]
3 – congress.gov/bill/116th-congress/house-bill/1994 [5/16/1900]
4 – law.com/newyorklawjournal/2019/04/05/what-to-know-about-the-2-big-retirement-bills-in-congress/ [4/5/19]