Have you heard of the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019? It swiftly passed in the House of Representatives in May, but was halted in the Senate and as of now, is still awaiting the vote. If you’re currently saving for retirement, looking to retire, or are an employer concerned with your retirement savings options for employees, it’s worth diving into this proposed legislation and learning how it can affect you.
What is the SECURE Act?
So, in a nutshell, what will the SECURE Act bring about if passed? It’s possible that the legislation may be a great development for you. Many of the act’s provisions are aimed to make saving for retirement easier and to extend the tax benefits of traditional retirement accounts like a 401(k) or traditional IRA.
In short, the SECURE Act would:
- Push back the age for required minimum distributions (from 70 ½ to 72)
- Remove age restrictions for IRA contributions
- Extend 401(k) investment opportunities to more part-time employees
- Allow for withdrawals (with no penalties) after the birth or adoption of a child (up to $5,000)
- Give tax incentives and other opportunities for more small businesses to offer retirement plans for employees without breaking the bank
However, the act does present some downsides for certain taxpaying beneficiaries with inherited retirement savings accounts. Recently, MarketWatch, an online financial news publication, published an article that talked about the potential implications of the SECURE Act, as well as the Tax Cuts and Jobs Act (more about that below). In it, the article’s author Bill Bischoff explains the negative implication of the SECURE Act:
If it becomes law, the SECURE Act would require most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. This is an anti-taxpayer change for beneficiaries who would like to keep inherited accounts open for as long as possible to reap the tax advantages. Under current law, the RMD (Required Minimum Distribution) rules for a non-spouse beneficiary allow you to gradually drain the substantial IRA that you inherited from Uncle Henry over your life expectancy from an IRS table.
While the act helps many people better prepare for retirement (and will not be a problem for those people who drain their retirement accounts themselves) this part of the bill could actually hurt those people who wish to make the most of their inheritance from “Uncle Henry,” by not delaying distributions to allow the investments to mature. Of course, there are additional provisions being made for certain beneficiaries. Bischoff explains:
The SECURE Act’s anti-taxpayer RMD change would also not affect accounts inherited by: (1) the spouse of the deceased account owner, (2) a beneficiary who is no more than 10 years younger than the deceased account owner, (3) a minor child of the deceased account owner, or (4) a disabled or chronically-ill individual. But everybody else would get slammed by the new 10-year account liquidation requirement. So you could only keep the big Roth IRA that you inherited from good old Uncle Henry open for 10 years after his departure.
While the SECURE Act is not yet passed, its momentum through the House and wide appeal among the majority of senators means a majority vote could likely occur. To ensure your financial strategy is in line with current tax legislation, it’s a good idea to schedule a meeting with a CPA who can help you translate tax laws and better prepare for your future.
How the TCJA Could Affect Your Tax-Exempt Gifts
Bischoff mentions that the SECURE Act isn’t the only tax legislation currently on the table.
The Tax Cuts and Jobs Act (TCJA) is legislation that passed in 2017, but is not a permanent tax reformation. Bischoff explains:
The Tax Cuts and Jobs Act (TCJA) drastically increased the unified federal gift and estate tax exemption from $5.49 million in 2017 to $11.4 million for this year, with inflation adjustments for 2020-2025. But the exemption is scheduled to revert back to the much-lower pre-TCJA level in 2026. Depending on political developments, that could happen much sooner. If it happens in 2026 or sooner, how would it affect the tax treatment of large gifts that you made while the ultra-generous TCJA exemption was in place? Good question.
Bischoff points out that lawmakers have proposed that those taxpayers who make large gifts yet a set-in-stone regulation. In any case, it may be a smart tax move to make large gifts now rather than waiting to see how the Congress and Senate’s political climate shakes out. However, a risk still remains that the gift will be taxed later down the road. In order to make the best decision for your estate, it’s important to take stock of your assets and, as Bischoff says, place your bet and act accordingly. Our Pine & Co. accountants can help you during this decision-making process and offer guidance to protect your assets and work to grow your wealth.
Make the Most of Your Retirement Savings
If you’re wanting to re-evaluate your business’ financial strategy or your own personal retirement savings strategy based on current changes to tax law, we can help. One of our experienced CPAs can walk you through the often-changing, and often confusing, tax laws. Contact us now to schedule a meeting!