After months of inaction, Washington insiders expect Congress to pass the long-delayed SECURE Act.
Retirees could see a total revamp of IRA and Required Minimum Distributions rules, some positive, some definitely negative.
If this proposal does become law, we’ll bring you more complete details as soon as they’re available, along with an analysis of how the revamp could affect you as early as next year – but here’s a quick summary:
What’s happening in Congress
Congressional experts say these retirement reforms are attached to a larger spending bill that needs to be approved by Friday in order to avoid a government shutdown. For that reason, Washington experts expect the bill to pass this weekend.
You may remember we wrote about the SECURE Act back in July, but then the proposal got stalled in Congress and seemed unlikely to pass this year. (The SECURE Act stands for “Setting Every Community Up for Retirement Enhancement”).
Check out our previous article on the SECURE Act:
“Changes to your IRA on the way? Not all of them are good”
What SECURE Act will change
Here’s a summary of the main provisions:
Delayed RMDs. Currently, retirement account holders must commence Required Minimum Distributions (RMDs) at age 70½. The SECURE Act would delay initial mandatory distributions until age 72. If you need to take withdrawals to cover your retirement expenses, the new rules won’t change anything. If, however, you have other sources of income to tap, this will help you defer taxes and let your IRA grow for longer.
IRA Contributions After Age 70½. Now, you cannot contribute to your Traditional IRA after age 70½. Under the SECURE Act, you can continue contributing at any age as long as you have earned income. This will help seniors working, even part-time, to save, defer income, and cut taxes well into their seventies.
There are other provisions that provide greater access to 401(k) plans for part-time workers, flexibility in making penalty-free retirement plan withdrawals to cover expenses of adoption or childbirth, and limited 529 withdrawals to repay loans and fund apprenticeships.
No more tax-saving “stretch” IRAs. The SECURE Act would take away the very popular and powerful “stretch” IRA provision. This is the ability under current law to leave funds in your IRA or other retirement plan to your children or other non-spouse beneficiaries, who can “stretch” withdrawals over their life expectancy. Withdrawals are still fully taxable, but your heirs can reduce the full impact of the tax bill by “stretching” withdrawals over an extended time period.
The SECURE Act would force almost all non-spouse IRA or retirement plan beneficiaries to withdraw inherited retirement funds within 10 years instead of over their lifetime. In some cases, especially when there is a larger inherited 401(k) or IRA account, this could mean extremely large tax bills and depletion of funds. It makes it a lot less appealing to save and leave a legacy for the next generation. And while it favors married couples, it harms singles and unmarried couples, who form an ever-growing portion of our society. It will make it harder to pass wealth to children and grandchildren, and means much bigger tax bills for heirs.
The Takeaway: As mentioned above, if this proposal does become law, we’ll bring you more complete details as soon as they’re available and recommend changes to your personal retirement strategy!