A Discussion of some tax proposals affecting IRA’s currently making their way through legislation
By Jon Aldrich
Over the years we have grown accustomed to the tax laws affecting those of us with IRA’s. You know, the ones, like having to start taking money out at age 70 ½ as a Required Minimum Distribution (RMD) even if you don’t need to because Uncle Sam wants to get his cut. Or, the ability to “stretch” the IRA by taking money out of an inherited IRA over the lifetime of the individual that inherits it even if this person was a child or grandchild of whoever established the IRA originally. If lawmakers have their way, these things may change soon.
There are currently two bills working their way through Congress. Both bills have a lot of similarities and track each other very closely, AND (believe it or not) have bipartisan support, so there is a good chance that one of these may become law. They also, of course, both have clever acronyms. In the Democratic majority House of Representatives the (SECURE) Act (Setting Every Community Up for Retirement Enhancement Act) has been approved by the House Ways and Means Committee which appears to clear the way for a full House vote at some time in the future (As of this writing, that could happen later this week). The Republican majority Senate recently introduced their own version called (RESA) (Retirement Enhancement and Savings Act).
Here are some of the key points in these bills, which many believe have a decent shot at becoming law:
- Spousal IRA rules remain unchanged. Surviving spouse’s can continue to take the deceased spouse’s IRA as their own and use their own life expectancy table for computing their RMD.
- Both proposals look to raise the age to take the first RMD to 72, up from 70 ½. Although a late breaking proposal in the Senate looks to raise this age to 75.
- Currently a non-spouse IRA beneficiary (i.e child) can “stretch” the required IRA distributions over their life expectancy. So if a child inherits the parents IRA at age 40, they are required to take the balance of the IRA out over their remaining life expectancy according to IRS Table I. For someone that is 40 years old when they inherit, that would mean that they could take out over approximately 44 years. Of course, they could take out sooner if they wanted to.
- Under the House version of SECURE, a non-spouse beneficiary would be required to take all the money out of the IRA within 10 years. Now this could be done however they choose. For example they could choose to wait until year 10 and take it all out, or equally each year, or whichever way they wanted to take it out as long as it was out by the end of year 10. Of course, you would want to take tax considerations into effect when deciding on how to take the funds from the inherited IRA.
- The version circulating the Senate (RESA) allows the current "stretch" provision on the first $400,000 (have also seen $450,000) and the remainder to be taken out within 5 years.
- Both versions allow exceptions for distributions to minor children, disabled or chronically-ill beneficiaries, or beneficiaries not more than 10 years younger than the deceased IRA owner. Both versions would apply to inherited IRAs for deaths after 12/31/2019.
- These rules would also apply to Roth IRA's, so although distributions from Roth's would not be taxable, they would have to be liquidated within the applicable time frame of whichever provision if any) gets enacted into law.
- Both the House and Senate versions contain a provision to make contributions to traditional IRA's (if one has earned income) after age 70 1/2. Currently one can only make contributions to Roth IRA's and not traditional IRA’s if you are working past age 70 1/2.
- The Act also makes it easier to offer annuities in 401k and 403b plans and also expands qualified use of 529 funds to homeschooling.
So, if one of these proposals gets enacted into law, it would essentially be the demise of the “stretch” IRA provision, as beneficiaries would be required to take amounts out much sooner then the current laws require.
For those that are gifting their IRA’s to charity, the law does not change anything. But for those that plan on passing IRA’s down to younger generations, it does change the ball game rather drastically. We will be watching this very closely.