The U.S. House of Representative passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on May 23. This act covers a lot of retirement issues, including changes to 401(k) plan options, delaying RMDs until age 72 and allowing contributions to IRAs past age 70 1/2.
But one of the most significant is a proposed modification of the “Stretch” IRA rules.
The current rules allow a spouse to rollover their deceased spouse’s IRA and declare it their own as a “spousal IRA.” This rule remained unchanged in the proposed legislation.
If a person other than a spouse is named as a beneficiary, that beneficiary can generally take their IRA distributions over their life expectancy under the IRS table 1. This allows the beneficiary to “stretch” the distributions and the taxes on the distributions over a long period of time.
The new rules greatly accelerate tax collection and can push the beneficiaries into a much higher tax bracket. The House version of SECURE is on its way to the U.S. Senate. It changes the stretch period from a life expectancy calculation to 10 years for non-spouse beneficiaries.
The entire balance of the inherited IRA, Roth IRA or employer plan has to be depleted within the 10 years. The Senate version of the bill is a little different in that it allows a stretch on the first $400,000 of aggregated IRAs, and the exceeding balance must be distributed within 5 years.
In virtually any circumstance, the beneficiary pays a substantial amount more in taxes than using a life-expectancy stretch.
This bill as a whole is geared towards helping Americans save more for retirement. But that is an entirely different article — we have a retirement savings crisis in this country.
The provisions of the stretch IRA rule changes, as they are written in the House version of the act, will have a dramatic effect on wealth transfer. These changes will require investors to be more prudent in their planning. Roth IRA conversions may now make sense for some pre-RMD investors.
As always, each investor is different and has his or her own unique set of circumstances needing to be planned for.
If you would like more information regarding financial aid or college savings, Vince Sturm can be reached at his Perry office at 515-465-9843 or at email@example.com.
Registered Representative of and securities offered through Berthel Fisher and Co. Financial Services Inc. (BFCFS). Member FINRA/SIPC. Investment advisory services offered through BFC Planning Inc. Generations Wealth Adivsors, BFCFS and BFC Planning Inc. are independent entities. Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax implications.