Secure Act Calls for Changes to IRAs, RMDs

Nixing the age cap for contributions and raising the age to start required minimum distributions could affect workers, retirees and heirs.

(Image credit: Daniel Grill (Daniel Grill (Photographer) - [None])

On the cusp of Memorial Day weekend, the house passed what could be a landmark retirement law, affecting workers, retirees and heirs alike. The legislation may shake up the rules for IRA contributions and required minimum distributions and upend many retirees’ estate plans. Some of the most impactful provisions of the bill affect existing retirement plans, says Tim Steffen, director of advanced planning for Baird.

IRA owners should take note of a few key highlights of the bipartisan Setting Every Community Up for Retirement Enhancement Act of 2019, which passed the House in a 417-3 vote and is now in the Senate’s hands. The three changes below will go into effect after December 31, 2019, if the House legislation is enacted as written. We’ll track the legislation closely and keep you apprised of any changes that may affect your retirement, tax and estate planning.

Age cap repeal.

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The Secure Act removes the age cap for traditional IRA contributions, which is currently 70 1/2. This change would allow older workers to stash a chunk of their earned income in a traditional IRA, just as they can currently in a Roth IRA. For those 50 and older in 2019, the maximum contribution is $7,000. An older worker who has enough income to cover the total IRA contributions could also contribute to a spousal IRA for a retired spouse.

RMD age increase. The House bill increases the starting age for required minimum distributions from retirement accounts to 72, from 70 1/2 currently. That extra 18 months of tax-deferred growth is a win for older workers and retirees who don’t need to tap their retirement accounts to cover expenses. Because the change would be effective after December 31, 2019, those turning 70 1/2 in 2020 would be the first to benefit. IRA owners currently taking RMDs would not be affected, says Steffen.

Stretch IRA loss. Although the Secure Act may benefit some retirement account owners, it’s not so friendly to nonspouse heirs. The legislation erases these heirs’ ability to stretch out required minimum distributions from inherited retirement accounts over the nonspouse heirs’ own life expectancies—a move that allows more of the money to grow tax-deferred and minimizes the heirs’ income tax bill. Instead, the legislation mandates that the inherited assets be withdrawn within 10 years. Steffen notes that “beneficiaries of larger accounts could be facing significantly larger IRA withdrawals—and therefore larger tax liabilities—than they had anticipated.”

This change will upend estate planning for many IRA owners and will require heirs to take a good look at their tax-planning strategies when handling a windfall. And while repealing the age cap on contributions and raising the age for RMDs could be beneficial, retirees will need to “weigh that with accumulating too much in an IRA,” says Leslie Thompson, managing principal at Spectrum Management Group. The loss of the stretch could make Roth accounts more attractive, she says. Heirs can withdraw Roth money tax free.

The Secure Act does offer a variety of exceptions to the 10-year rule. Surviving spouses are exempt, as are chronically ill, disabled or minor heirs. Also excluded are heirs who are less than 10 years younger than the decedent. These categories of heirs are deemed to be “eligible designated beneficiaries”; qualification for that status is determined as of the date of death of the account owner. Minor heirs will age out of the exclusion when they hit the age of majority—18 or 21, depending on state law—at which time the 10-year distribution rule will kick in.

While there is bipartisan support for the House bill, the Senate has a similar bill in the works—the Retirement Enhancement and Savings Act, known as RESA—so Congress will have to reconcile the two before any legislation can be sent to the President’s desk. For more details on the Secure Act’s IRA provisions and other changes affecting retirement plans, go to (opens in new tab) and search for H.R. 1994. (opens in new tab)

Rachel L. Sheedy
Editor, Kiplinger's Retirement Report