Congress recently passed the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act, by a shockingly wide margin (417-3). The Senate is considering a similar bill called the Retirement Enhancement and Savings Act (RESA) with similar changes. If made into law, these bills will have a significant impact on both Retirement Planning and Estate Planning. Let's review the SECURE Act in more detail.
The SECURE Act mostly accomplishes what its name promises when it comes to retirement. The Act will enhance retirement for many Americans. Some highlights of the Act in its current form include:
- Delaying Required Minimum Distributions from the current age 70.5 until age 72
- Eliminating the restriction on making IRA contributions after age 70.5 (the would be no longer any age restrictions)
- Making it easier for smaller employers to band together to offer 401k plans to their employees
- Gives greater access to part-time employees to join the company 401k plan
However, on the estate planning & income tax front, the Act would create some significant planning challenges. Under current tax law, if you inherit an IRA from someone other than your spouse, you can generally take distributions from that IRA over your lifetime. This is referred to as the Stretch-IRA. The Stretch-IRA provisions allow you to smooth out both the distributions themselves and the taxes you'll owe on those distributions. Under the SECURE Act, you would instead need to distribute the entire IRA within 10 years.
The elimination of the Stretch-IRA creates an issue from a tax perspective. If you inherit an IRA with significant balances, larger distributions due to the 10 year rule could push you into a higher tax bracket. This would not only be an issue year-to-year but it would also mean that you would be paying more in taxes than you otherwise would have been given smaller/longer term distributions.
With the elimination of the Stretch-IRA individuals who planned to pass retirement assets to supplement their heir's lifetime income would have a more limited ability to do this. Additional estate and financial planning strategies may be necessary to accomplish this goal should the Act become law.
I'll keep you abreast as the legislation develops and as always please feel free to contact me to discuss how this may impact your personal retirement and estate plan.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment advice. If you have any questions regarding this Blog Post, please contact us.