Excited About the RMD Legislation Congress is Considering? Why it's Not All Good News.
Big changes may be on the horizon for retirees – and not all of them will be good news for academia.
On May 23, 2019 the House of Representatives passed the Setting Every Community Up for Retirement Enhancement and Savings Act of 2019 (SECURE). Both this and an almost identical bill, the Retirement Enhancement and Savings Act (RESA), are currently in the hands of the Senate. If legislation is passed, this will be the first major reform to US retirement plans since the Pension Protection Act of 2006.
There are three key changes present in these bills that may significantly impact how university professionals approach both retirement savings and estate planning.
#1) Delay the required minimum distribution (RMD) date. If passed retirement plan participants wouldn’t need to start taking distributions until age 72 (currently age 70½) – that’s an extra 18 months of tax-deferred growth. Note that the changes will only go into effect December 31, 2019 so only those turning 70½ in 2020 or later would benefit. It will not apply retroactively for those already required to take distributions.
#2) Repeal of the age cap for contributions to traditional IRA’s. Most university professionals contribute to a 403(b) or 457 via their university retirement plans, neither of which currently impose an age cap on contributions. With very little exception, if you are employed at a university you can contribute to their retirement plan regardless of your age. However if you do have a traditional IRA, the current regulation states that you cannot make new contributions past age 70½. The proposed legislation will eliminate this rule.
#3) Loss of the “stretch” IRA. In order to help pay for this legislation (tax credits for small businesses who start offering a retirement plan to their employees and the lost income tax revenue from the delay of the RMD age), beneficiaries would be required to withdraw 100% of an inherited IRA within 10 years, and pay the resulting income taxes on the distributions. Exempt from this rule are surviving spouses, disabled individuals, minors, and those who are less than 10 years younger than the account owner. For all others, this legislation will erase their ability to stretch out distributions across their own lifetime and incur significant income tax consequences.
For university professionals, a surviving spouse can typically take ownership of a university retirement account and it can stay under the protective umbrella of the university retirement plan. However if a non-spouse is inheriting the 403(b) or 457, they are commonly required to roll the plan assets into an Inherited IRA – which would then become subject to the 10-year rule if passed. The passing of this rule would impose significant tax implications for your heirs and upend many existing estate plans.
Nothing is certain until a law is signed, but it will be important for university professionals to stay informed and be prepared to adjust both their approach to retirement savings and their estate plans if these changes go into effect. Filbrandt & Company is following this legislation very closely and will be prepared to proactively guide our clients should any changes go into effect.