On May 23, 2019, the House passed a bipartisan bill by a vote of 417-3 to enhance the opportunities for individuals to save more for retirement. The bill is now before the Senate, which, with some modifications, should find its way to the president for signature before the end of the year. This blog focuses on 3 key issues which will impact most individuals with retirement plans, requiring them to take a second look at their existing strategy.
Repeal of the maximum age for contributing to an IRA. Currently, individuals cannot contribute to an IRA once they reach age 70½. Since many baby-boomers are choosing (or are forced) to work beyond the normal retirement age of 65 or 66, the change will allow them to continue deferring funds into a tax-deferred account until they stop working. This is also consistent with the current law that doesn’t provide an age limit for contributing to an employer retirement plan. The change would be effective for years beginning after 2019.
Increasing the age for taking the required minimum distribution (RMD) from retirement accounts. Currently for IRA owners, RMDs must start in the year an individual turns age 70½, but can be deferred beyond 70½ (if not a 5% or greater owner) for employer-sponsored retirement plan distributions until the employee stops working. The SECURE Act would increase the RMD starting age from 70½ to 72 (the Senate version could be as high as age 75). This change will allow individuals who don’t currently need the additional income to keep those funds invested in a tax-deferred account. The change would be effective for distribution years beginning after 2019 for individuals reaching 70½ after 2019.
Payouts from inherited retirement accounts must be taken within 10 years after death. With regard to individuals dying after 2019, The Act provides that the payout of inherited IRA and employer retirement accounts would need to be made within 10 years after death (rather than stretched out over the beneficiary’s lifetime), except in the case where the beneficiary is (1) the surviving spouse, (2) totally disabled, (3) under the age of majority, or (4) less than 10 years younger than the IRA/plan account owner. The result in many cases will be an acceleration of larger than normal distributions resulting in a larger that normal federal and state income tax burden each year. The Senate version is slightly different in that it provides for a shorter 5-year payout period, except for the first $450,000 which could be stretched out over the beneficiary’s life. Either way, additional planning to properly time the claiming of business losses, large charitable contributions (e.g., to a donor-advised fund), or large medical deductions to match a large distribution made in a particular year will be important. A few work-around solutions to the accelerated tax dilemma include:
- using an irrevocable life insurance trust to help the beneficiary pay the income taxes (similar to purchasing life insurance to pay anticipated estates taxes),
- similarly, the account owner could begin taking distributions and use the proceeds to fund a life insurance policy (within a trust) that would make lifetime payments to the trust beneficiary, and
- for those that are philanthropically inclined, have the retirement plan paid to a charitable remainder unitrust (CRUT), whereby the CRUT beneficiary continues to receive lifetime income, similar to the old stretch-out rules.
One particular problem area will be where the plan beneficiary is a conduit-type trust which pays out over the trust beneficiary’s lifetime. These trusts will need to be reviewed and possibly reformed.
Regardless of which version of the bill is passed, taxpayers and their advisors will need to revisit their retirement and estate planning strategies with regard to qualified plans.
If you have questions or want further information on the above or other income, retirement or estate planning techniques, please contact Jordon Rosen at jrosen@belfint.com.
Photo by David Hilowitz (License)
