While changes to traditional IRAs, RMDs offer some benefits, there are tradeoffs.
Broad proposals are in the works in the retirement savings arena to ease rules on tax-deferred savings vehicles, make it easier for employers to offer 401(k)-type savings plans and also convert balances into annuities for lifetime income.
In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE). Key provisions within the SECURE Act offer more flexibility for when distributions would have to be taken out of tax-deferred accounts. On the flip side, the Act takes direct aim at estate planning strategies that enable heirs of traditional IRAs to stretch out those payments throughout their lifetimes.
In addition to the SECURE Act, there are other legislative proposals winding their way in the Senate, known as the Retirement Enhancement and Savings Act of 2019 (RESA), and the Retirement Security and Savings Act of 2019 (RSSA).
The SECURE Act would repeal the age cap for contributing to a traditional individual retirement account (IRA). Currently, if you have a traditional IRA you aren’t able to contribute to it after age 70½. That is different from Roth IRAs, which don’t have age caps, though the amount you can contribute begins to be phased out above $122,000 for single filers and $193,000 for married, joint filers.
The act would increase the starting age for required minimum distributions (RMDs) to 72, up from 70½. This provides an additional 18 months of tax-deferred growth for tax-qualified plans. It also could mean a higher RMD if you were to leave that money in the account until age 72 – because of the potential for the account’s growth and shorter life expectancy (that is, if the life expectancy tables used to calculate RMDs aren’t updated).
The “Stretch” IRA would be eliminated for non-spouse heirs. This essentially means that heirs who aren’t spouses would no longer be able to stretch out required minimum distributions from inherited tax-qualified accounts like IRAs and defined contribution plans over their lifetimes. Some beneficiaries would be exempt, including the disabled or chronically ill, minors, and individuals less than 10 years younger than the account owner. Those not meeting that criteria would have to withdraw the money over a 10-year timeframe under the SECURE Act. That time frame compresses to within five years under the RESA bill in the Senate if the account value exceeds $400,000.
For the various changes to take effect in the various bills, lawmakers from the House and Senate would have to reconcile any differences before a full House and Senate vote. That means it is still early days, as they say, with regards to the changes. However, we think it is important for you to consider looking into other strategies and options if what is, in essence, the “death” of the Stretch IRA is incorporated into law and the tax code.
Let’s talk about tax planning, your tax-deferred qualified accounts, ways to minimize taxation during retirement, and ways you can transfer wealth to your heirs in a tax-advantaged manner. Call your Silverhawk Private Wealth financial planner at 480.296.0200.