Feeling SECURE (act)?

Does it feel like IRAs haven’t seen many big changes lately? Well, that feeling is mostly correct. Besides moderate increases in the amount an individual can contribute to a Traditional or Roth IRA each year, the rules have remained mostly unswerving. With the bipartisan ‘Setting Every Community Up for Retirement Enhancement Act’ (SECURE Act) however, this stagnation could change and, mostly, for the better. Lawmakers from both sides of the aisle support changes that address the evolving financial landscape in America, including longer employment periods and lifespans, as well as how inherited IRAs are distributed.

Most notably, in response to Americans working and living longer, the SECURE Act extends the age at which required minimum distributions (RMD) must begin from 70 ½ to age 72. This, along with the removal of the prohibition against those over 70 ½ making traditional IRA contributions, means Americans are better equipped to grow their savings for retirement. Better yet, for Americans with an annual income above the Roth IRA contribution limit ($203,000 for married filing jointly or $137,000 for single filers), the ability to contribute to Traditional IRAs past age 70 ½ will make Back Door Roth IRAs even more appealing.

Before we shower you with too much upside though, the cost of these revisions comes at the sacrifice of Stretch IRAs, which would be effectively eliminated if this act passes. As it stands today, a Stretch IRA allows for a Traditional or Roth IRA to be passed from one generation to another without any interruption to the tax deferred growth, other than an annual RMD. In short, at present there is no requirement for the non-spouse beneficiary of a Traditional IRA to deplete the account’s balance during his or her lifetime.

If the SECURE Act passes however, non-spouse beneficiaries will be required to distribute an inherited IRA within 10 years of the owner’s passing. In their current form, we like Stretch IRAs and, under the right circumstances, they can facilitate multi-generational wealth. Though, if it means working Americans can contribute to Traditional IRAs and defer RMD’s longer, we’re comfortable with the elimination of Stretch IRAs picking up the cost if this act passes.

We look forward to monitoring its progress through the legislative process and will keep you informed of any updates.

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Tom Markowitz, PhD

Dental specialist