Leon LaBrecque - Apr 23, 2019
Legislative Update: ON May 23, 2019, the House passed the SECURE Act (H.R. 1499) effectively in its original form from Ways and Means. The vote was overwhelming 417-3. See here for an overview of the Act. See here for a commentary on the new RMD age.
On March 29, the House Ways and Means Committee unveiled HR 1994, or the SECURE (Setting Every Community Up for Retirement Enhancement) Act. This is a bipartisan bill, co-sponsored by Rep Ron Kind (D-Wi), ranking member Kevin Brady (R-Tx) and Mike Kelly, (R-Pa). On April 1, the Senate, in a similar move, introduced a companion bipartisan bill, RESA (the Retirement Enhancement and Savings Act). The proposed laws cover a lot of retirement issues, but the most far-reaching is a modification of the ‘Stretch’ IRA rules. Both proposals accelerate IRA distributions and accordingly, taxes on inherited IRAs for non-spouse beneficiaries.
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. At age 70 ½, the owner of an IRA must begin Required Minimum Distributions (RMD). One proposed change contained in the House bill is to increase the RMD age to age 72. If a person other than a spouse is named as a beneficiary (which is almost inevitable), 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. As an example, if a 25-year old inherited her grandmother’s $1 million IRA, she would take her distributions using the Table 1 life expectancy of 57.2 years. Her distribution would be $1,000,000/57.2 or about $17,482. Depending on her other income, she may pay federal taxes anywhere from about $548 (if her RMD was her only income) to about $6,468 (if she were in the highest bracket). Her inherited IRA, if she made 7%, would grow as well to about $1.75 million in ten years, and keep growing for most of her life.
The new rules greatly accelerate tax collection and can push the beneficiaries into a much higher tax bracket. Mark Wilson, president of MILE Wealth in Irvine, observed “Eliminating the stretch for larger accounts is not a tax simplifier, it’s a tax accelerator. The government is eventually going to get their share.” The House version, SECURE, changes the stretch period to 10 years. For the granddaughter in the example above, she would have to take her distributions sometime in the 10-year period. This could be at regular intervals, at the end of the period, or whenever she wishes. She will pay taxes on the entire distribution as she takes it. At the end of 10 years, the IRA would be depleted, and she would have paid tax on the entire IRA. The Senate version allows a stretch on the first $400,000 of aggregated IRAs and the exceeding balance must be distributed within 5 years.
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