SECURE Act IRA changes may affect retirement planning strategies dramatically. On May 23, 2019, 417 members of the U.S. House of Representatives voted to change IRAs with the “SECURE Act” (Setting Every Community Up for Retirement Enhancement Act of 2019). If Congress and the White House agree on a bill, it will change the landscape for retirement contributions and required IRA withdrawals. This article describes some of the SECURE Act’s key aspects and an alternative U.S. Senate bill.
SECURE Act IRA Changes: Good for Retirees, But Terrible for Beneficiaries
SECURE Act IRA changes would remove the top age limit (now 70 1/2) for IRA contributions. The Act would also raise the minimum age to begin taking required minimum distributions (RMDs) from IRAs (the “Required Beginning Date,” or RBD). The RBD age change would increase from 70 1/2 to 72. Both changes promote retirement savings for IRA owners, but new RMD rules will increase many IRA beneficiaries’ taxes.
SECURE Act IRA changes Would Displace Beneficiaries’ “Stretch” Distribution Options With 10-Year RMD Withdrawal Rule
The SECURE Act IRA changes would wipe out beneficiaries’ popular “Stretch” IRA distribution strategy. A 10-year IRA beneficiary withdrawal rule would shorten deadlines for most IRA beneficiaries to withdraw inherited IRA benefits. Beneficiaries would have to withdraw their fully taxable IRA benefits within 10 years after the IRA owner’s death. The 10-year inherited RMD requirement would wipe out the popular “stretch” RMD withdrawal strategy. It would also shift tax burdens to deceased IRA owners’ designated beneficiaries.
Current RMD Withdrawal Rule for IRA Beneficiaries
Current law allows the designated beneficiaries avoid huge tax bills by delaying RMD withdrawals. Beneficiaries can withdraw inherited IRA immediately, but the withdrawals are completely taxable and they may increase beneficiaries’ income tax brackets. Savvy beneficiaries stretch IRA benefits RMDs over most of their remaining life expectancies (the “stretch” RMD strategy) to delay taxation and avoid higher tax brackets. The stretch RMD strategy helps younger beneficiaries build retirement savings on a tax-deferred basis if they can delay withdrawing some of the IRA benefits. Some families use special trusts to stretch IRAs for beneficiaries. The Stretch strategy protects distributions for young, disabled, and financially distressed beneficiaries. See “Planning with Retirement Plans, Annuities, and Life Insurance” on our website for more information about retirement planning.
SECURE Act IRA Changes Include 10-Year RMD Exceptions
The SECURE Act IRA changes include exceptions to its 10-year RMD requirement for certain beneficiaries. The act would preserve current “spousal rollover” rules for a deceased IRA owner’s surviving spouse. Also, the 10-year RMD requirement would not apply to a deceased IRA owner’s minor child until the child’s 18th birthday. Other exceptions apply to certain disabled and chronically ill beneficiaries.
U.S. Senate’s RESA Alternative
An alternative U.S. Senate bill shares the SECURE Act’s idea of shortening their time for RMD withdrawals. The “Retirement Enhancement and Savings Act” (RESA) would apply a 5-year distribution period to inherited IRA account balances over $400,000.
Why Is Congress Making New IRA Rules For Your IRA?
Congress needs to increase funding for Social Security, Medicare, and Medicaid. Americans are living longer, but they are becoming more dependent on Social Security, Medicare, and Medicaid in retirement. Retirement savings increases may help seniors pay their own care costs in later years. (See the article entitled, “IRA Planning for Long-Term Care and Longevity” for more information about retirement planning for long life.) The shortened RMD withdrawal period may increase federal tax revenue by accelerating income tax payments on beneficiaries’ on RMDs and pushing beneficiaries into higher income tax brackets.
New IRA Rules May Make Roth IRAs and Qualified Charitable Distributions More Attractive
The new IRA rules may increase the attractiveness of Roth IRAs and Qualified Charitable Distributions. Roth IRA Owners reduce IRA taxation with tax-free Roth withdrawals after age 59 1/2. Alternatively, traditional IRA owners can eliminate IRA taxation through Qualified Charitable Distributions and charitable IRA beneficiary designations.
Roth IRAs: “Tax Me Now” for Tax Savings Later
A Roth IRA owner contributes after-tax funds to an Roth IRA account. Roth IRAs offer no initial income tax deductions, but Roth withdrawals after age 59 1/2 are tax-free. Some people prefer traditional IRAs because they want to claim current IRA income tax contribution deductions. The income tax burden of converting traditional IRAs to Roth IRAs also discourages some people from making those conversions. The new rules may increase Roth IRA usage to protect owners’ families from heavy taxation on accelerated RMD withdrawals.
Qualified Charitable Distributions: Uncle Sam as Your Charitable Contribution Partner
Qualified Charitable Distributions appeal to people who have sufficient wealth or income that they do not need IRA withdrawals. IRA owners can direct IRA plan administrators to distribute tax-free RMDs directly to charities. Plus, Qualified Charitable Distribution satisfies the IRA owner’s RMD requirements and a qualifying charity can receive the RMD distribution tax-free. So, Uncle Sam becomes a charitable contribution partner in Qualified Charitable Distributions.
About the Authors
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys.
Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
Find more information about these and other topics at www.HawkinsElderLaw.com, like @HawkinsElderLaw on Facebook, follow @HawkinsElderLaw on Twitter, follow https://www.linkedin.com/company/hawkinselderlaw on LinkedIn, or call us at 812-268-8777. © Copyright 2019 Hawkins Elder Law. All rights reserved.
[See our Disclaimers page about relying on this website’s contents.]