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.
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