Congress recently proposed changes to the laws affecting retirement accounts. Consider how they could impact you.
The U.S. House of Representatives recently passed the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) which, if signed into law in its current form, would significantly impact the laws affecting retirement accounts. Among other things, the SECURE Act:
1) Raises the required start date for required minimum distributions (RMDs) from pre-tax retirement plans from age 70½ to 72 to recognize increased life expectancy for account owners; this would apply to individuals who turn 70½ after December 31, 2019.
2) Allows individuals to make contributions to traditional Individual Retirement Accounts (IRAs) at any age; currently, individuals cannot make contributions after reaching age 70½.
3) Requires that a beneficiary of a defined contribution plan or IRA (including, 401k, 403b, SEP IRA)—other than the owner’s spouse, the owner’s minor children, disabled or chronically ill individuals, and individuals less than 10 years younger than the owner—withdraw the entire balance of the account within 10 years after the owner’s death, eliminating the beneficiary’s ability to stretch the withdrawals (and the income tax liability) over his or her life expectancy; this would apply to account owners who pass away after December 31, 2019.
4) Permits withdrawals without penalty for qualified birth or adoption expenses.
While the SECURE Act is intended, in large part, to modernize existing retirement legislation and to encourage retirement savings, the new 10-year beneficiary withdrawal requirement (item 3 above), which precludes some beneficiaries from stretching withdrawals from inherited retirement accounts over their life expectancies, may give pause to some people. It is important to remember that:
1) Spouses are exempt from the 10-year requirement and will continue to be able to stretch required withdrawals over their life expectancies. (N.B. It is not certain whether trusts that qualify for the estate tax marital deduction will be afforded the same exemption.)
2) For older individuals (including children) who are named beneficiaries of retirement accounts, the beneficiary’s life expectancy (i.e., the length of time over which the beneficiary could withdraw the account under current law) may not be that much longer than the 10-year proposed limit. Consider the age of your retirement plan beneficiaries to understand the extent to which the 10-year limitation might impact your wealth plan.
3) Some beneficiaries who are in low income tax brackets or who need quick access to liquidity at the time they inherit retirement accounts may withdraw the funds within a short time frame anyway.
Before becoming law, the SECURE Act would need to pass the Senate and be signed into law by the President. We do expect there to be some changes to the bill as it continues through the legislative process, which could take several months and possibly longer. You should consider speaking with your JPMorgan representatives about how the legislation may affect you.
J.P. Morgan, its affiliates, and employees do not provide tax, legal or accounting advice. The tax-related material contained herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
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