As we quickly approach year end, now is the time to think about income tax planning and to review proposed legislation that could affect your financial health in retirement.
Changes may be on the horizon for legislation regarding Individual Retirement Accounts (IRAs). The House passed the SECURE Bill earlier this year, known as H.R. 1994 – Setting Every Community Up for Retirement Enhancement Act of 2019.
The Senate revived its own version known as Retirement Enhancement and Savings Act (RESA). This is not the first rodeo for the RESA bill. The last Congress closed without final action on RESA. While the same may happen this year, looking at the proposed bills is prudent before making estate planning decisions.
Proposed Changes Found in Both Bills
- Both plans repeal the maximum age for traditional IRA contributions, thus allowing older workers to continue to contribute during their extended work years. Currently, you are not allowed to contribute to a traditional IRA after age 70 1/2, but you are allowed to contribute to a Roth IRA.
- The SECURE Act increases the traditional IRA required minimum distribution age to 72. RESA delays it until age 75. Currently, you must begin required minimum distributions from a traditional IRA when you reach age 70 1/2. Required Minimum Distributions do not apply to Roth IRAs.
- Both plans limit the ability to “stretch” withdrawals from an Inherited IRA for the lifetime of the non-spousal beneficiary. The plans differ as to the length of time with the longest being 10 years. This provision is added to generate the tax revenue necessary to pay for delaying the start of required minimum distributions.
- Both acts keep the current spousal rollover feature.
- Both acts contain changes to 401(k) plans, 529 accounts and other miscellaneous retirement savings vehicles.
What Does This Mean for Your Estate Plan?
As you may know, contributions to a Roth IRA are not deductible for income tax purposes, the Roth IRA grows tax-free. Plus, the Roth does not require the owner to withdraw from it during his/her lifetime. A traditional IRA, on the other hand, is deductible in the year of contribution, grows tax-deferred and requires the owner to withdraw a required minimum distribution during his/her lifetime and report those distributions as ordinary income.
While the acts target changes to both traditional and Roth IRAs, they are still good savings vehicles to leave your beneficiaries at the time of your death – particularly the Roth IRA. Under current law, your child (or grandchild) or other beneficiary can receive an Inherited IRA in which the beneficiary can elect to withdraw the IRA over his/her lifetime. Using a Roth IRA stretches the growth tax-free over a period of decades. This currently also applies to a trust named as beneficiary if the proper language is included in the trust document.
Because a Roth IRA is not deductible, the owner will be contributing after tax dollars to fund it. If the ultimate beneficiaries have to remove the funds in five to 10 years, the Roth IRA becomes somewhat less attractive as a vehicle to pass on wealth to the beneficiaries because it does not grow tax-free for as long. The value of this vehicle still largely depends on the incremental difference in tax rates in the future vs the present.
While neither SECURE nor RESA may pass in 2019, some kind of legislation will no doubt survive to see another day as the push to increase tax revenues marches on. It is worth watching and considering moving forward and especially in making today’s decision of Roth vs. traditional.
Review Your IRA Beneficiaries
While you are doing your planning, now is an excellent time to revisit your IRA beneficiary designations. If you don’t have a copy in your file, call your IRA custodian to request a copy. If you have questions, we are always here to review them with you.