Big Changes Coming to IRAs: The SECURE Act
New retirement legislation, known as the SECURE Act, has passed in the House of Representatives, has bipartisan support in the Senate, and is showing promising signs of becoming law by the end of 2019. The law makes several significant changes to retirement accounts, including pushing back Required Minimum Distributions from age 70 ½ to age 72, setting a maximum of 10 years to distribute a non-spousal inherited IRA, and eliminating the age limit on IRA contributions. While the final details will not be known for a few more weeks, there are already several planning opportunities that we are considering if the bill becomes law.
The most notable change for existing retirees is the elimination of the ‘stretch-IRA’ for inherited IRAs. Under current law, a non-spousal inherited IRA must be distributed over the life expectancy of the beneficiary. Therefore, the beneficiary of an IRA can ‘stretch’ distributions over many years, and with proper planning, can stay in the lower tax brackets. The current drafts of the SECURE Act would require a non-spousal inherited IRA to be distributed over a maximum of 10 years. For large IRA’s the change could push the beneficiary into higher tax brackets, and significantly increase the tax bite of the inheritance.
While everyone’s situation is different, one implication under the new law is that Roth IRA’s will become relatively more attractive, especially to those who have large IRA’s that may be left to children. We frequently encourage our clients to consider Roth conversions, especially while they are in lower tax brackets, and we anticipate increasing use of this strategy.
Of course, a second notable change is the pushing back of Required Minimum Distributions from age 70 ½ to age 72. As life expectancies rise, the change is welcome to help keep funds in tax deferred growth as long as possible. We do not yet know how the law will handle those who are already 70 ½ but have not reach 72. We will be working with our clients who are taking RMD’s to make sure they are in compliance with the new rules once they are released.
Finally, we will highlight the proposed elimination of the age limit on IRA contributions. Under current law you are not allowed to contribute to an IRA once you have reached age 70 ½. The SECURE Act repeals this section of the Internal Revenue Code, opening the opportunity to continue contributions for longer.
Ultimately, it is still not clear what legislation will be passed by congress in 2019, and whether some of these proposed sections will be eliminated before the final bill is signed. Nonetheless, expect to hear more about the SECURE Act in the coming months. We will be tracking the SECURE Act as it moves through congress and will be communicating with our clients if the new law requires changes to their retirement or estate planning. If you have any questions about your situation, please give us a call.