The SECURE Act and Your Retirement: An Update

I wrote previously on the Empyrion blog about the new legislation working its way through Congress that could have a significant positive impact for both retirees and those trying to save for retirement. Since then, the House passed their version of the legislation, and it is currently under consideration by the Senate. Most observers believe the legislation has a very good chance of passing.

Here are the three provisions of most immediate interest to retirees and those approaching retirement:

  1. Required minimum distributions (RMDs) from retirement plans would start at age 72 instead of age 70;
  2. You can keep contributing to your retirement plans until age 72;
  3. So-called “stretch IRAs” will have a maximum 10-year withdrawal period.

In addition, the legislation would make it easier for employers to band together to offer multiple-employer plans (MEPs) for 401(k)s.

For retirees, the option of delaying RMDs until age 72 is a clear win. Especially for thriving retirees, it typically makes sense to defer taxable distributions from retirement accounts as long as possible, giving the accounts the maximum opportunity for tax-free compounding and growth. Also, continuing to make contributions to a tax-favored account for a longer period of time allows for more retirement savings.

The elimination of the “stretch IRA” is more problematic. This refers to an IRA that passes to an heir when the original owner — usually a parent or grandparent — passes away. Formerly, the inheritors could stretch the distributions from the account over their lifetimes, minimizing the amount of taxable distribution required in a given year. But the new law requires liquidation of an inherited IRA within ten years (spouses and minor children are excluded from this requirement). This means that those with substantial IRA assets will lose a very useful means of minimizing the taxation of the account for their heirs.

One way around this problem is a Roth conversion. Because distributions from Roth IRAs are not taxable, some may choose to convert their traditional IRAs to Roth accounts, paying taxes on the account now in order to avoid taxes on the distributions later. For those wishing to support a favorite cause or charity, donating the IRA to charity or utilizing a charitable remainder trust may provide a solution. Some may even opt to donate their yearly RMD by means of a qualified charitable distribution.

However the final legislation shakes out, deferring taxable income and increasing tax-favored savings will always be good ideas. And isn’t it nice to see Congress actually doing something that helps people, for a change?

Stay Diversified, Stay YOUR Course!