New Tax Proposal re: Retirement Savings

It seems there are often new tax proposals. In fact, a couple of prior articles this year examined other tax proposals, such as those from Senator Elizabeth Warren (D-MA) and Senator Bernie Sanders (I-VT). But, regardless of their merits, those proposals are not likely to go anywhere given they are opposed by most Republicans.

However, unlike those earlier proposals, the Setting Every Community Up for Retirement Enhancement Act of 2019, or “SECURE Act,” seems to have bipartisan support. We’ll have to wait and see if it is eventually passed by the House and Senate.

The legislation has many components. But, the two biggest changes concern Required Minimum Distributions or the amounts which must be withdrawn from the IRA/retirement plan. Currently, taxpayers must begin taking Required Minimum Distributions from their IRAs and retirement plans beginning when they reach age 70 ½. The Secure Act would increase this to age 72. This would benefit taxpayers as they would not be required to begin taking withdrawals as early, thus allowing their balances to continue tax-deferred for an additional 18 months.

Next, after the death of the Participant in the IRA/retirement plan, the beneficiary whom the Participant had designated to receive the benefits must begin taking distributions. Currently, there are complex rules regarding the timing of these distributions, but generally, non-spouse beneficiaries must take the distributions over the beneficiary’s own life expectancy. For example, if the beneficiary is 58 at the Participant’s death, they’d have a 27-year life expectancy. Under current rules, they’d have to withdraw at least 1/27^th the first year, 1/26^th the second year, and so on until all the assets are distributed from the plan.

The SECURE Act would alter the post-death Required Minimum Distributions substantially. Most non-spouse beneficiaries would be required to take distributions of the entire balance of the IRA/retirement plan by the end of the tenth year following the Participant’s death. This would substantially accelerate distributions.

There are exceptions in the Act for a beneficiary who is the spouse, a minor child, a disabled person, etc. But if passed, the SECURE Act would significantly impair much of the planning which is currently done to obtain a stretch of IRA/retirement plan benefits.