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In a bi-partisan effort, the House of Representatives recently pass the SECURE Act - Setting Every Community Up For Retirement Enhancement. The bill, that will now go to the Senate, makes significant changes that will impact most Americans who have an estate plan, are preparing for retirement, or are all ready to retire. Here are two important changes that will impact most of us in one way or another:
Required Minimum Distributions start at age 72
Most IRA holders want to postpone taking income until the last minute. This just got easier under the SECURE bill. Instead of taking income at 70½, IRA holders can now push their start date to age 72. Not only that, they can continue to make tax deductible contribution until 72 as well. This allows more time to build capital for retirement.
Stretch IRAs will be shortened
The troubling feature for estate planning is the bill will no longer allow IRA holders to pass their IRAs to heirs over the heirs‘ lifetime, spouses and minor children are excluded. Additionally, the bill stipulates that upon death, the IRA must be liquidated within ten years. This change is expected to raise $16 Billion dollars over the next decade, according to the Joint Committee on Taxation. The bill also gives the IRS the ability to take up to one third of your IRA and retirement plans which is a concern for some people.
Taxpayers who wanted to pass this asset to heirs will now need to look at alternative tax strategies. Remember, you can give your IRA to charity and take a deduction under the tax law. Also, you can consider liquidating during your lifetime and using the money to buy life insurance for the benefit of heirs.
It should be noted that there are other provisions in the law that will benefit families. If you have a 529 plan, up to $10,000 can be withdrawn to pay down student loans which will help make a dent in the nation’s student loan debt epidemic.
Another upside is that the bill allows new parents to withdraw up to $5,000 without being penalized from their IRAs or 401k plans to help defray birth and adoption expenses.
One major change is the ability of employers to now offer annuities as an investment option in their employer sponsored 401k plans. This change gives participants a way to protect capital and provide a guaranteed income for life, once they retire. The Senate is expected to take up this Bill for discussion. Assuming they pass a comparable bill, it will have to go through a reconciliation committee and then will be sent to the President for signature. At this point, most people believe the Senate and President support these changes which means the bill will most likely pass.
If you have questions about how the SECURE Act may impact your estate plan, please feel free to contact me at 415-235-9162 and schedule a complimentary consultation.