If You Own an IRA or 401(k), Get Ready for the SECURE ACT

Because Congress has an insatiable appetite to spend (even when they have to borrow to do it), it seems it’s always looking for new ways to take more of your money. The latest example is the Setting Up Every Community for Retirement Enhancement (SECURE) Act. Don’t let the title fool you—your retirement is not likely to be “enhanced.” In fact, the SECURE Act is nothing more than Congress’s attempt to get its hands on more of your IRA or 401(k) coupled with a few minor positive changes. If this Act becomes law (it passed the House 417-3), ultimately more of your retirement accounts will be paid to the IRS. Here is the major change that will hit your wallet:

Elimination of the stretch IRA. For all non-spouse beneficiaries, the entire IRA account must be withdrawn within 10 years of the death of the owner. Since a non-spouse beneficiary can currently withdraw an IRA over their life expectancy, this will result in a significant income tax acceleration. Fortunately, at least for now, Roth IRAs remain non-taxable. For minors who inherit an IRA (even if as part of a trust), the 10 year rule would not begin until age 18. The tax acceleration for them when compared with the current law will be even worse.

Thankfully, there is some good news about the SECURE Act. While I believe the elimination of the stretch IRA far exceeds the good news, here are some of the positive changes:

1. IRA contributions are permitted after age 70 ½.

2. Required minimum distributions (RMDs) do not begin until age 72.

3. Allows for multi-employer 401(k) plans. Permits part-time employees to participate.

4. New parents can withdraw up to $5000 without penalty.

5. Tax credits to encourage small businesses to create a retirement plan.

The hope is that the 10 year rule will be eliminated from the final bill. Thus far, the Senate version—the Retirement Enhancement and Savings Act (RESA)—is much different, but it would at least exempt IRAs over $400,000. Certainly better, but hardly a win for taxpayers. Stay tuned for further updates.