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What Does Congress Have in Mind for IRAs and RMDs?

It’s likely that the months ahead will see some big changes to IRA and RMD requirements. There’s just no way to know when all of this will occur, especially now that the summer is upon us and Washington prepares for a break.

Pending legislation in both the House and the Senate may soon bring sweeping changes to retirement plans that will impact people currently working, retirees and those who inherit IRAs. Nixing the age cap for contributions and raising the age for required RMDs, are just two potential changes.

Kiplinger’s recent article, “Secure Act Calls for Changes to IRAs, RMDs,” reports that IRA owners should understand some of the key provisions of the bipartisan Setting Every Community Up for Retirement Enhancement Act of 2019. This bill passed the House in a 417-3 vote and is now in the Senate’s hands.

The three changes that are discussed below will go into effect after December 31, 2019, provided the House bill is enacted as written.

The Age Cap Repeal. The Secure Act gets rid of the age cap for traditional IRA contributions, which is now at 70½. This would let older workers save some of their earned income in a traditional IRA, just as they can now in a Roth IRA. For those 50 and older in 2019, the maximum contribution is $7,000. An older worker who has enough income to cover the total IRA contributions, could also contribute to a spousal IRA for a retired spouse.

An Increase in the RMD Age. The House bill increases the starting age for required minimum distributions (RMDs) from retirement accounts to 72, from 70½. That’s a win for older workers and retirees, who don’t need to tap their retirement accounts to cover expenses. Because the change would be effective after December 31, 2019, people who turn 70½ in 2020 would be the first to benefit. IRA owners currently taking RMDs wouldn’t be impacted.

The Loss of the “Stretch IRA.” Although the Act may benefit some retirement account owners, it’s not so nice to non-spouse heirs. The bill would get rid of heirs’ ability to stretch out RMDs from inherited retirement accounts over the non-spouse heirs’ own life expectancies. This currently allows more of the money to grow tax-deferred and lessens the heirs’ income tax bill. However, the Act would require inherited assets to be withdrawn within 10 years. Beneficiaries of larger accounts could have much bigger IRA withdrawals, as well as larger tax liabilities, than they’d anticipated.

For IRA owners, this change may require a review of estate plans. Repealing the age cap on contributions and raising the age for RMDs could change retirement dates for some workers. What if you have already retired? For those who are using their IRAs for non-spouse heirs, how does a smaller window of time for IRA distributions change their estate plan?

The legislation has not passed yet, but some form of it will likely come to pass. Speak with your estate planning attorney to find out how the new law changes may impact your estate plan, but don’t make any big changes until the bills become law.

Reference: Kiplinger (June 14, 2019) “Secure Act Calls for Changes to IRAs, RMDs”

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