A piece of legislation working its way through the U.S. Senate presents a double-edged sword to Americans hoping to improve their savings for retirement. The SECURE Act of 2019, or “Setting Every Community Up for Retirement Enhancement,” passed overwhelmingly in the House in May, and now its companion, the Retirement Enhancement and Savings Act, or RESA, is apparently on the fast track in the Senate. This bi-partisan legislation does have some positive features. The Act would increase the age for required minimum distributions (RMDs) for IRAs and 401(k)s from 70 ½to 72, enable part-time workers to participate in their company’s 401(k) plans, allow small businesses to go in together to purchase group 401(k) plans, and more. But one provision has the potential to do real harm to people who were hoping to leave the balance of their retirement plan funds to their children in a tax-efficient way, and opponents are calling it a “hidden money grab” by the government.
Taking “Stretch” IRAs to the Breaking Point
Back in April, when I contributed comments to a Forbes article by Leon LaBrecque, it seemed that few people had raised concerns about the tax implications for those who leave their IRAs to non-spouse beneficiaries, such as children or grandchildren. Right now, the law allows those beneficiaries to “stretch” the RMDs of inherited IRAs and retirement plans over their lifetimes to minimize the impact of taxes in any given year (hence the name, “stretch” IRAs). Under the new proposed legislation, those beneficiaries would generally need to take their RMDs (and pay taxes on them) over a 10-year period instead of their lifetime, which could drive them into a higher tax bracket during those years. (The current rules would still apply in case of deaths occurring before 2020, and some exceptions exist under the proposed legislation for those who qualify as “Eligible Designated Beneficiaries.”) The current version of the draft Act exempts total IRA balances of a deceased IRA owner under $400,000 from requiring their beneficiaries to take their RMDs over 10 years.
Even if your IRA balance is greater than $400,000 today, chances are this legislation won’t impact you dramatically, if you’re likely to use most of your IRA money during your lifetime. If you have a large IRA, or potential health issues, however, you likely need to reexamine your estate plan with your financial adviser and estate-planning attorney, particularly if you had planned to leave your traditional IRA to a trust, because you could face new tax consequences if the Act passes.
Options to Discuss with Your Advisory Team
The ramifications of eliminating the stretch IRA are complex at best, but as Ed Slott discusses in FA News, those with large IRAs, or IRAs being left to trusts, do have options. He suggests that advisers talk with their clients about five major strategies, including beneficiary planning, tax bracket management, Roth IRA conversions, life insurance, and charitable trusts. Depending on your situation, one or more of these strategies may be useful in helping you avoid a situation that could cause financial strain for a loved one.
Right now, there’s no telling when RESA may come up for a vote in the Senate, or when a version of the Act could become law, but reviewing your estate plan now wouldn’t be a wasted exercise in any case. If AMDG Financial can be of service, I hope you’ll contact us as soon as possible. We work with a team of subject matter experts on behalf of our clients, and we also work with our clients’ other advisers. Ultimately, as a fiduciary firm, our goal is to ensure that any recommendations we make will be in your family’s best interests now and in the future.