Have you heard of the bill that is currently going through Congress called the “Setting Every Community Up For Retirement Enhancement” (also known as the SECURE Act).
The SECURE Act is going to bring about major changes to IRA and retirement planning, more than we have seen in decades. Namely, it’s effectively going to put an end to “stretch IRAs” as we know them. While the House approved the SECURE Act at the end of May, it has now been sent to the Senate for vote and they have some differences to the bill pending.
If you have an IRA, chances are the beneficiary of your IRA is your spouse. However, if you have an IRA that you don’t plan to use, then your beneficiary might be your youngest grandchild. The IRS currently requires that you withdraw a certain amount every year once you turn 70 ½ (also known as a required minimum distribution or “RMD”). The “stretch IRA” works because younger beneficiaries have a longer life expectancy, which allows for longer periods of time for the money to compound, smaller RMDs and taxed much less. Thus, a larger sum of money going to the beneficiaries. The House version of the bill changes the stretch period to a maximum of 10 years. The Senate version of the bill allows a stretch of the IRA on the first $400,000 of aggregated IRAs and the exceeding balance must be distributed within five years. Under the current rules, a younger beneficiary would take a distribution over their life expectancy using a chart while under the SECURE Act, the beneficiary would have to withdraw all the money within 10 years.
Generally, these pending changes are intended to modernize and update aspects of retirement planning. Giving flexibility for individuals who work beyond the age of 70 ½, allowing for continued contributions as well as certain academic contributions to be made to IRAs. This enables people to start saving for their retirement at a much younger age.
As noted, the House has voted and approved the SECURE Act and this pending legislation is currently awaiting on a vote from the Senate-with both sides hashing out their versions of the bill and the rules and regulations to be finalized. We, at the Law Firm of Kavesh, Minor & Otis, are keeping a close eye on this legislation. Once we have information about how this may impact IRA accounts and any IRA planning that you have done (or can do), we will definitely be reaching out to discuss this further with our clients.