Ask the Rational Investor: New Law Changes IRA Strategies
In mid-December Congress passed the SECURE Act, which has recently received a lot of news coverage. The retirement bill has been touted as a win for “Main Street” as it eliminates the IRA beneficiaries’ ability to “stretch withdrawals.” A popular strategy for retirees with significant assets in their retirement accounts.
The SECURE Act also changes the age at which retirees must start withdrawing from their retirement account from age 70 ½ to 72. Increasing the age of required minimum distributions (RMDs) will help many retirees who are working longer.
In the past, retirees who planned on leaving assets to their heirs considered a strategy termed “Stretching their IRA,” which allowed an inherited IRA beneficiary to withdrawal assets over their lifetime rather than the creator of the IRA.
“Stretching” a retirement account let the assets grow tax-free longer and provided a nice nest-egg for the beneficiary.
The SECURE Act eliminates this strategy as it forces the beneficiary to withdrawal all assets from the retirement account over a 10-year period. Failure to do so results in a 50% tax penalty on the assets remaining in the account.
CNBC provided the following example: “[a] beneficiary of a $1 million account could withdraw roughly $33,000 a year over 30 years under current rules; however, that would be $100,000 a year under new rules.”
The new bill accelerates the time period that beneficiaries of inherited IRAs need to withdraw their assets, likely resulting in a higher tax bill and less growth.
Retirees and individuals in their 60’s will need to carefully review their savings strategy.
The time-tested rules of retirement are changing and require savers to analyze their specific circumstances. If an individual has considerable assets outside of their retirement savings, they’ll likely need to examine how they will spend their assets from tax-deferred accounts and taxable accounts.
Sources: CNBC, waysandmeans.house.gov, plansponsor.com
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