Congress considering 3 major changes to IRAs
Proposed legislation in Congress would make three significant changes to the way you can contribute to and withdraw from your IRAs.
While Washington gridlock could of course sidetrack the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, the measure does enjoy broad bipartisan support.
Here’s what it would mean, if passed:
First, the act delays the age at which you are required to begin making annual withdrawals from an IRA. Currently, you’re required to make so-called required minimum distributions once you hit age 70½. The bill would shift that to age 72.
The impact of this is straightforward: Assuming markets cooperate, you’d have more money in your retirement account before you must begin making mandatory annual withdrawals. This advantage of potentially having a larger account balance could last throughout your retirement.
The second change involves contributions to your IRA. Currently, you generally can’t contribute to a traditional IRA after you reach age 70½. The act would permit continued traditional IRA contributions after age 70½ if you continue to work and have earned income from wages or owning a business. You also could contribute to a spousal IRA for a retired spouse if you meet certain income requirements.
Again, the impact of this is simple: Your retirement nest egg can last longer if you’re able to accumulate retirement funds over a longer period.
These two changes proposed in the SECURE Act are viewed as positive. But, as always, when the government giveth the government also tends to taketh away.
The SECURE Act would end the way non-spouse heirs can currently stretch out required minimum distributions from an inherited IRA. Currently, if you have an inherited IRA you can stretch out withdrawals over your life expectancy, which allows more money to grow tax-deferred and minimizes your estate tax bill. Instead, under the proposed legislation you’d have to withdraw all inherited money within 10 years, which could create much larger tax liabilities than originally envisioned.
This change may require new planning strategies for heirs who want to avoid a tax hit.
Fortunately, the bill offers some exceptions to the 10-year rule. These include surviving spouses as well as chronically ill, disabled or minor heirs, as well as heirs who are less than 10 years younger than the decedent. The 10-year rule would affect minors once they become 18 or 21 years old, depending on their state of residence.
One strategy is to convert a traditional IRA to a Roth IRA because heirs can withdraw Roth money tax-free.
We’ll be following this legislation and will keep you up to date on how this may affect you and your financial plan. If you have any questions about how this may affect you, contact one of our advisors today.
Important Disclosures
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting http://www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.ELV-17-02