As Family CFO, our clients feel comfortable and confident asking us when new legislative changes are proposed; especially as it relates to IRAs. We have heard questions about proposed legislation making the rounds in both houses of Congress, regarding changes to Age Cap repeal to IRAs, RMD Age Increase and the possible loss of the Stretch IRA. Read more about these new proposals: Secure Act Calls for Changes to IRAs, RMDs and Beware, the IRS is Eyeing Your Inherited Money
These proposals are just that – proposals! They are not law… yet. So what can we expect now? We suspect change would come first from the reconciliation of the House and Senate’s two separate bills on Retirement Reform as a whole, and then the revised bill would have to pass both houses and earn the President’s signature.
Let’s take a deeper dive into each of these proposals and how it could impact you:
Age Cap Repeal Proposal
The Secure Act removes the age cap for traditional IRA contributions, which is currently 70 ½. This change would allow older workers to stash a chunk of their earned income in a traditional IRA, just as they can currently in a Roth IRA. For those 50 and older in 2019, the maximum contribution is $7,000. An older worker who has enough income to cover the total IRA contributions could also contribute to a spousal IRA for a retired spouse.
Age Cap Repeal – How It Impacts You
This would be a positive impact for most Americans, if you plan to have earned income beyond 70.5 years old.
RMD Age Increase Proposal
The House bill increases the starting age for required minimum distributions from retirement accounts to 72, from 70.5 currently. That extra 18 months of tax-deferred growth is a win for older workers and retirees who don’t need to tap their retirement accounts to cover expenses. Because the change would be effective after December 31, 2019, those turning 70.5 in 2020 would be the first to benefit. IRA owners currently taking RMDs would not be affected, says Steffen.
RMD Age Increase – How It Impacts You
This proposal allows IRA holders more time (1.5 years more) to grow assets in IRAs before you are required to start Required Minimum Distribution (RMD) withdrawals. If you have other income sources, like Social Security, Pension, Passive Income, Farm, etc, you don’t have to add in RMD income until 72.
Stretch IRA Loss Proposal
Although the Secure Act may benefit some retirement account owners, it’s not so friendly to nonspouse heirs. The legislation erases these heirs’ ability to stretch out required minimum distributions from inherited retirement accounts over the nonspouse heirs’ own life expectancies – a move that allows more of the money to grow tax-deferred and minimizes the heirs’ income tax bill. Instead, the legislation mandates that the inherited assets be withdrawn within 10 years. Steffen notes that “beneficiaries of larger accounts could be facing significantly larger IRA withdrawals – and therefore larger tax liabilities – than they had anticipated.
Stretch IRA Loss Proposal – How It Impacts You
There are exceptions to this rule: spouses of deceased account IRA owners, a nonspouse beneficiary who is no more than 10 years younger than the deceased IRA owner, a minor child of the deceased IRA owner and/or a disabled or chronically-ill person.
So what does this mean? It means, yes , this change could impact your adult children. After the IRA holder and the spouse die, any nonspousal heirs would have only 10 years to take out RMD withdrawals rather than the current law, where a nonspousal heir has the ability to stretch out the IRA RMD over the rest of his or her life. Currently, the law provides for any nonspousal beneficiary to stretch an inherited IRA for possibly decades, thus gaining the power of time and compounding growth and interest. If the proposed changes of the Secure Act were to become law, an IRA holder could consider Roth IRA conversions during lower income tax years, while in lower tax brackets. By adding these conversion dollars each year, you would pay the tax now, while moving funds from future taxation into Roth IRA, where the funds would remain tax free for you and your heirs, with no RMD requirement.
What’s Next?
This change will upend estate planning for many IRA owners and will require heirs to take a good look at their tax-planning strategies when handling a windfall. “If legislation were to pass into law as is, then retirees would have to weigh the pros and cons of the age cap repeal and raising of the RMD age and how these changes apply to their individual or family situations,” says Vince Pastorino, Lead Advisor at Buttonwood Financial Group.
The Secure Act does offer a variety of exceptions to the 10-year rule. Surviving spouses are exempt, as are chronically ill, disabled or minor heirs. Also excluded are heirs who are less than 10 years younger than the decedent. These categories of heirs are deemed to be “eligible designated beneficiaries”; qualification for that status is determined as of the date of death of the account owner. Minor heirs will age out of the exclusion when they hit the age of majority – 18 or 21, depending on state law – at which time the 10-year distribution rule will kick in.
While there is bipartisan support for the House bill, the Senate has a similar bill in the works – the Retirement Enhancement and Savings Act, known as RESA – so Congress will have to reconcile the two before any legislation can be sent to the President’s desk. For more details on the Secure Act’s IRA provisions and other changes affecting retirement plans, go to Thomas.gov and search for H.R. 1994.
If you would like to discuss your options in more detail, the Buttonwood Team stands ready to assist! Let our Team of professionals coordinate your retirement and tax strategy while you spend your time doing what you love. Contact us today to schedule a conversation.
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