Only two months ago, a bill was approved in the U.S. House of Representatives, and is predicted to be approved by the Senate. This legislation is going to make a significant difference, we believe, in both retirement planning and estate planning. Instead of mandatory minimum withdrawals (RMDs) from IRAs and qualified retirement accounts beginning at age 70 ½, the mandatory withdrawals can now be deferred until age 72. In addition, under this new law, the maximum age for making traditional IRA contributions is repealed. “This is the most substantive promotion of retirement savings in the last 15 years,” House Ways and Means Chairman Richard Neal remarked, referring to the Setting Every Community Up For Retirement Enhancement (SECURE) Act.
Meanwhile, additional legislation called RESA (the Retirement Enhancement Securities Act) is being discussed that would actually raise the RMD age to 75. While disagreements remain over various details in both bills, the intent is to recognize that people are living longer.
The key to who benefits from the new law will depend substantially on how much each retiree needs the money, MarketWatch.com observes. For those who need cash to pay health bills, for instance, deferral may not be a choice; they would see little benefit from the new law. Wealthier retirees, on the other hand, might benefit greatly by deferring withdrawals (which are taxed as ordinary income and can push them into higher tax brackets and into paying a surtax on Medicare and Social Security benefits).
Understanding and utilizing the RMD rules is part of the estate planning process, Fidelity points out, naming several specific tie-ins:
- Beneficiaries may be able to take an income tax deduction for estate tax paid on your retirement account, which can substantially reduce the income tax they will owe when they withdraw the assets.
- Consider an irrevocable life insurance trust. The liquidity can be used to pay federal estate tax on your retirement account, so beneficiaries will not need to accelerate distributions to cover the tax.
- If you’re concerned about creditor protection for any of your beneficiaries, you need to know that an inherited IRA is not eligible for bankruptcy protection, and you may wish to consider trusts.
- Stretch IRAs (beneficiaries can retitle the accounts as inherited IRAs, taking RMDs based on their own ages)
- Trusteed IRAs (you specify contingent beneficiaries that cannot be changed by the primary beneficiary).
- by Rebecca W. Geyer