Recently, the U.S. Senate passed a bill that makes significant changes to the laws governing the tax-advantaged accounts that most Americans rely on to supplement Social Security during their retirement. The President signed it into law on December 20.
(We note that when the House passed the bill back in July, it was approved 417 votes to 3 — a welcome sign that away from the media limelight, bipartisanship is not dead when it comes to making rational policy decisions that will benefit American citizens.)
Here is a summary of some of the new law’s most significant changes. If you believe that any of these changes will affect you, please be sure to consult a tax professional.
Guild Investment regularly provides this kind of planning assistance to our clients and their family members. We are in contact with CPA firms and tax attorneys who can advise you on complex issues if they arise.
The new law (known as the SECURE Act — “Setting Every Community Up for Retirement Enhancement”) aims to give more Americans access to the benefits of tax-advantaged retirement accounts. Here are some of the new law’s most significant changes:
- The law pushes back the age at which retirees with traditional IRAs must begin taking required minimum distributions to 72, from 70½;
- It will allow continued contributions to traditional IRAs for as long as a saver or their spouse is still working, rather than barring additional contributions after 70½;
- It allows the use of tax-advantaged 529 accounts to repay student loans;
- It incentivizes small businesses to set up 401(k) accounts for employees, and makes it easier for them to do so, particularly for part-time workers;
- It encourages the inclusion of more annuities in 401(k) plans by removing employers’ legal liabilities in the event of the annuity provider’s failure. (We are generally not fans of annuities, due to the excessive and opaque fees they often pay to those who sell them.)
No More “Stretch IRAs” For Many
Of course no legislation is without its downsides. The new law makes changes to so-called “Stretch IRAs” — a strategy that many retirees have used to transfer tax-advantaged accounts to heirs and greatly lengthen the time that the assets in those accounts could continue to appreciate tax-free. An IRA left to a grandchild, for example, could previously be distributed over a very long period of time. Now, many IRA heirs will have just 10 years to withdraw the assets.
This change in the law does not apply to surviving spouses, who are still covered by the old rules. But by and large, the “Stretch IRA” strategy is no longer an option for many retirees planning their wealth transfer. For those who made planning decisions on the basis of the old law, the change will be an unpleasant reminder that lawmakers are capable of pulling the rug out from underneath your well-laid plans.
Still, retirees could adapt to the change in a few ways, for example, by making a spouse, rather than a grandchild, the heir to inherit their IRA. Those who plan to leave their IRA to a trust on their death should review the trusts they have set up to see if they still make sense after the passage of the new law.
If you’re a client of Guild’s and you believe that the law’s changes may affect you or a family member, please reach out to our team.
