Congress is debating a major new bill known as the SECURE Act. It passed in the House 417-3. This is very rare in divided Washington. The Senate has not passed this yet, but they are working on a similar bill. With this kind of majority, something will pass; the idea behind this legislation is improving retirement outcomes for Americans.
People rank saving on taxes as their second most important priority when considering retirement issues. There are some potential changes that could have a major impact on your taxes. It is likely that the age to start taking required minimum distributions (RMD) will increase to age 72 from the current 70½. This is important because your qualified money can grow longer before it needs to be taken out. This could make more money available when one spouse passes away.
Income goes down when one spouse dies. One Social Security goes away and sometimes pension income decreases. Living expenses do not go down as much because many of life’s expenses are fixed. Property taxes, maintenance, utilities and many other expenses stay the same. It is ironic, when income goes down, taxes go up. This is because you only get one personal exemption and income tax rates are higher for single people.
While not finalized yet, the SECURE Act could end the stretch IRA. This is a planning tool that some people use to help future generations. Under the House version the account would have to be completely distributed within 10 years. There is an exception for spouses, who could still continue the current practice. Estates of people already deceased would most likely be grandfathered.
This makes tax planning even more important. One step might be considering Roth conversions. You must pay the tax at the time of conversion. However the balance grows tax free if you are over the age of 59 ½ and have had the account for at least five years. There are no RMD for the original account owner.
Many people have the largest part of their assets tied up in qualified assets such as IRAs and 401(k)s. During lower income years you might make Roth conversions or contribute directly to a Roth. While you do not get a tax deduction, the money could grow tax free. There might also be some opportunities to do Roth conversion now since tax rates have been lowered. They are scheduled to go back up in a few years if Congress does not extend the law. Keep in mind that these conversions increase your income which could affect Part B and D premiums for people on Medicare.
The SECURE Act could also help some young families. It is proposed that new parents could withdraw up to $5,000 from their retirement plan to help pay expenses from a birth or adoption without paying the 10% early withdrawal penalty. You would still have to pay income taxes. Remember, while this might help your cash flow now, it will have a negative impact on your retirement. You will have lost decades of tax-deferred earnings.
As this new law works its way through the Senate, there probably will be some changes that will need to be reconciled before it becomes official. Something is likely to happen because of the overwhelming support in Congress. When the bill is finalized, we will bring you an update.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
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