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Prepare for Sweeping New IRA Legislation

Legislation passed by the House of Representatives on May 23rd would dramatically change current IRA tax law.  The bill, entitled the “SECURE Act", would change the age at which one must begin taking IRA distributions. It would also change distribution requirements for IRAs inherited by children or other non-spousal heirs. The bill passed with wide bipartisan support in a vote of 472-3. 

Under current IRA law, one must begin taking their required minimum distributions at age 70 ½. The "SECURE Act" would allow IRA owners to delay taking their required minimum distributions until age 72.  This change would allow IRA owners to benefit from the advantage of tax deferral over a longer period of time.  Most will view this as a positive change.

A change that may not be viewed as positive would affect those “non-spousal beneficiaries" of an inherited IRA.  Under current law, children or other heirs who inherit an IRA can benefit by “stretching” distributions out over their lifetime (often referred to as a Stretch IRA).  Note:  Exceptions to the requirement would include minors and children with disabilities.

If enacted, the new law could significantly compress the time period in which a non-spousal IRA beneficiary (children or other heirs) is required to take distributions to just 10-years.  For many, this may not only accelerate their payment of taxes but may also push them into a higher tax bracket.  Note:  This change would also require those who have inherited Roth IRAs to distribute the account over the 10-year period (though tax-free).

The House has passed the "SECURE Act" along to the Senate which has their own version of the bill entitled “RESA 2019”.  Among other differences, this version allows for a $400,000 exclusion per beneficiary.      

While an amalgamation of both bills is likely, we do not know what form a final product may take, but it seems likely that change is coming. 

Portfolio Advisors will continue to monitor legislative developments to keep you abreast of any changes, as well as any planning issues that may need to be considered going forward. 

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