A Proposed Tax Bill Could Change Retirement Planning

September 5, 2019  |  

A Proposed Tax Bill Could Change Retirement Planning

Back in May, the U.S. House of Representatives overwhelmingly passed a landmark retirement reform bill called Setting Every Community Up for Retirement Enhancement” (SECURE).

The bill, which is awaiting passage in the Senate, makes significant changes that will impact most Americans who are preparing for retirement – or who are already retired. There are three important changes that will impact most of us in one way or another. Some of the more critical proposed changes are:

  1. Required Minimum Distributions start at age 72.
  2. Stretch IRAs will be shortened.
  3. You don’t have to stop saving for retirement at age 70½.

So, what does the SECURE ACT really mean for you and your family? Will it make you feel more (or less) secure?

Unless the income from your IRA is an integral part of your retirement income, most IRA holders want to postpone taking income until the last minute. This will get much easier to do under the SECURE bill. Instead of beginning your Required Minimum Distribution (RMD) at age 70-½, IRA holders will be able to delay their start date until to age 72. Even better, they will be able to make tax deductible contributions until 72 as well. This allows more time to build capital for retirement as compounding is your friend.

Sounds great on the surface, but let’s take a closer look. What happens after a person passes away? For starters, the bill will no longer allow IRA holders to pass their IRAs to heirs over the heirs‘ lifetime – often referred to as the Stretch IRA. Spouses and minor children are excluded. Additionally, the bill stipulates that upon death, the IRA must be liquidated within ten years. This change is expected to raise $16 billion dollars over the next decade, according to the Joint Committee on Taxation. The bill also gives the IRS the ability to take up to one third of your IRA and retirement plans which is a concern for some people.

Solutions

Taxpayers who want to pass assets to heirs will now need to look at alternative tax strategies.  An approach that will likely become even more popular are strategic Roth IRA conversions.  A Roth conversion is the process of moving money from a pre-tax IRA to a Roth IRA with the goal of paying tax at potentially more favorable rates.  The Roth IRA can then be a tax-free asset used to manage your tax position in retirement or be passed to heirs as a tax-free asset.  Even if your heirs are required to withdraw the assets within 10 years, the Roth withdrawals will be tax-free to them.

For those who are charitably inclined, existing strategies such as donating your IRA to charity, implementing a Charitable Remainder Trust, or donating your RMD through a Qualified Charitable Distribution will likely become even more attractive.  We will be discussing these strategies with you, as well as your estate and tax advisors, as circumstances dictate.

Conclusion

As you read this, the Senate is expected to take up this Bill for discussion. Assuming they pass a comparable bill, it will have to go through a reconciliation committee and then will be sent to the President for signature. At this point, most people believe the Senate and President support these changes which means the bill will most likely pass. Unless we see any major changes in the Senate.

Please feel free to contact us at any time if you have concerns about your retirement plan under the new SECURE landscape. I’m happy to help.

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.  Diversification does not eliminate the risk of market loss an A long-term investment approach cannot guarantee a profit. This communication may include opinions and forward-looking statements.  All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.  All expressions of opinion are subject to change.  You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes. Any references to outside content are listed for informational purposes only and have not been verified for accuracy by the Adviser.  Adviser does not endorse the statements, services or performance of any third-party author or vendor cited. Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients.  Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.


About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.
%d bloggers like this: