The U.S. House of Representatives just passed a bill to change many rules about retirement accounts, such as Individual Retirement Accounts (IRAs). The bill now heads to the Senate for consideration. Although the Senate may change the bill, the retirement account rules will be changed sooner rather than later. There is simply too much support for change. Evidence of that can be found in the fact that the bill passed the U.S. House of Representatives on a 417 to 3 vote. That is an overwhelming margin. With so much support behind changing the rules, very little can stand in the way. So lets explore the proposed changes. They may not all make it into law, but reviewing them will give us a sense of the changes we may face.
Later Age For Taking Required Minimum Distributions (RMDs)
The law currently requires that a retirement account owner begin taking minimum distributions from their retirement account by the time they reach age 70 ½. Otherwise, severe penalties will be imposed.
Under the proposed law, an account owner can delay minimum distributions until they reach age 72. This will allow those who do not need distributions for their living expenses to keep their retirement accounts intact longer. As a result, it delays the income tax that must be paid when distributions begin. And it means the retirement accounts will not be as depleted at the owner’s death, so larger retirement accounts pass to beneficiaries. This proposed change may be a good one. But there are other proposed changes that offset it.
Mandatory Withdrawal of Inherited Retirement Account Balances: 10-Year Rule
The law currently allows the owner of an inherited retirement account to take distributions from the account in a variety of way. With few exceptions, the owner must take distributions from the account each year. But rather than use the age of the deceased owner to determine the amount of each distribution, the age of the new owner is used to determine the amount of each distribution. Because the new owner is typically younger than the previous owner, the distributions and resulting tax burden are smaller than they would be if using the previous owner’s age.
Under the proposed law, the owner of an inherited retirement account must withdraw the full balance of the retirement account within 10 years of inheriting it. The effect of this change could be huge. For example, it will force the complete distribution of the account over a shorter span than under current law. This means a higher tax burden created more quickly, especially if the distributions from the retirement account push the account owner into a higher tax bracket. Additionally, if the inherited account owner planned to pass the account to their own beneficiaries, the account will not exist if the owner lives at least 10 after inheriting it. And, after the full distribution, the funds remaining will be much smaller because of the higher taxes generated from the accelerated distribution schedule (10-year rule).
What Should You Expect?
You should expect change. With the eye of legislators aimed at retirement accounts, it is simply a matter of time before changes occur, and the changes are likely to be large. Although these proposed changes may not become law, changes are coming.
The best way to protect yourself from surprises and higher taxes is to be proactive. Evaluate your retirement accounts at least quarterly. And stay informed about how the retirement account laws affect you and how they will affect the beneficiaries of the accounts. Lower taxes and better protection for you and your family are just a few of the benefits you get from being actively involved with your Estate Planning/Elder Law Attorney, financial advisor, and accountant. Estate Planning/Elder Law attorneys, like me, along with your financial advisor and accountant are your financial team. We are here to help you each step of the way. Contact us. And let your friends know we are here to help them, too.