Impact of The SECURE Act

With all the political turmoil and intensity going on in Washington D.C, you may be surprised to find that there is a bipartisan retirement reform bill underway. The bill passed the House overwhelmingly and is on the way to the senate and it is expected to receive support from both sides of the aisle and pass. We took the time to read the bill and breakdown the major takeaways and how they can affect you before, during, and after retirement.

The three major changes affect people with an IRA or will roll their 401k to an IRA after they retire or leave their company. IRAs are tax-deferred accounts. You do not pay taxes until the money is withdrawn at a later date during retirement. Due to the uncertainty of the future tax environment, Roth Conversions have become a key tax planning initiative during retirement planning. Roth conversions allow you to move money from an IRA, pay the current taxes, and leave it in a Roth so it can grow tax-free forever. All three of the major changes are essentially a form of tax reform. The bill increases the previous rule that retirees cannot contribute to an IRA after the age of 70.5. The statistics show that many retirees will work on the side to cover their retirement costs and it is unreasonable not to allow then to store money in an IRA. The second change comes with an increase in the Required Minimum Distribution age from 70.5 to 72. This increases the Roth conversion timeline and could allow retirees to safely transition money into an after-tax Roth account without incurring heavy taxes. By adding an extra 18 months to the timeline it will allow retirees to start their tax planning early and spread their IRA withdrawals out to incur the lowest tax penalty on their Roth conversion. The third change allows those who perform a Roth conversion as part of their retirement tax planning to benefit from the suggested estate tax laws. The new change requires all IRA account distributions to be paid out within the first ten years after the account owners death. The individuals listed below will be exempt from this change:

• Surviving spouse
• A disabled or chronically ill individual
• Individuals that are not more than ten years younger than the deceased owner
• A child that has not reached the age of majority

This portion of the bill is included to pay for the other tax-favourable provisions to do with RMDs and elimination of the contribution age limit. Roth conversions could help beneficiaries avoid complex tax situations when they are left with an IRA that the must withdraw from before ten years are up. It is important to plan for retirement in a holistic way in order to include all possible scenarios. These changes are significant and they can all be beneficial if put to use in the right way. If this bill goes through the senate make sure to look through your retirement plan and see how and where it will affect you.