There are two pieces of legislation that are working their way through the House and the Senate. The goal of which is to incentivize and encourage people to save more often and save earlier, but there’s more to them than that.
The Setting Every Community Up For Retirement Enhancement Act (SECURE) is the legislation moving through the House. The Senate has their own version of a similar act. Both pieces have a lot of things in common, namely they both want to create retirement plans that have annuity options within them. They also want to require retirement plans to tell the contributor at least once a year what their lump sum would equate to as an annuity payment.
It’s about income, not assets. Imagine knowing how much per month you would be getting out of your retirement account once you retire at the age of 65 at the top of each statement you get.
There is talk in the House measure to push the required minimum distribution from 70.5 all the way up to 75. For most people this won’t affect them, it will affect people who are not dependent on their RMD’s right away. This could eventually force them into a higher tax bracket.
RMD’s are designed to force you to liquidate your IRA vehicles before you die. If they are pushing back the age limit, they may also force you to take more money out and subsequently increase the amount of taxes you’re going to have to pay.
If you consider the current rules around inheriting an IRA right now, the RMD’s would reflect your expected life span. This means you probably wouldn’t be forced to take much each year if you’re relatively young. In the proposed legislation, you could instead be forced to liquidate the inherited IRA in only 10 years and be forced to pay taxes at your highest marginal tax bracket.
This could be considered to be a huge tax grab by the IRS. On one hand, they appear to be making it easier to save more money, but what happens on the backend?
Some of the proposed provisions will help, but there are a couple of things in the legislation that will cause some major issues from a tax planning perspective.
Some version of the bill will likely be signed into law. All this really does is underscore the need for tax planning, and shifting money from tax deferred to tax free.
Keep in mind that if the money goes to a spouse, they won’t have to spend the money over a ten year period, but as a widower their tax bracket just gets cut in half. That means it’s much easier to hit the higher levels of marginal taxes.
This legislation is all the more reason to proactively pay taxes on these accounts at historically low tax rates. At the very least it could significantly help out your heirs, as they will probably be at a point in their lives where they are paying very high taxes and could probably use some help.