Is It Time to Amp Up Your ROTH Accounts?

On May 23, 2019, the US House passed H.R. 1994-Setting Every Community Up for Retirement Enhancement Act of 2019, aka SECURE Act. The bill is now before the US Senate.

Here are some of the proposed changes to retirement funding and distributions included in the SECURE Act: 

Repeal of the Maximum Age for IRA Contributions

Current law only allows those individuals under the age of 70 ½ (as of December 31) to make contributions to IRAs — assuming they have taxable compensation to do so. This bill would remove the age restriction. This would be helpful to those who plan on working past age 70 ½ and who want to contribute to retirement savings.

Increase Age for RMDs

Under current law, Required Minimum Distributions (RMDs) are required, starting at age 70 ½ (except under certain circumstances). This bill would increase the starting age to age 72. The additional 18 months will provide some minimal benefit by delaying the tax bill due on the RMD for another year and a half. However, unless there is a change to the life expectancy tables, the value of the account will be divided over a shorter period of time. 

RMDs for Non-Spouse Beneficiaries Limited to 10-Year Payout

Under current law, if a non-spouse inherits an IRA, there are several options, to the beneficiary, for taking distributions. These include: immediately; by the end of the 5th year; or the RMD option.  

The RMD option will likely result in the beneficiary receiving distributions over his or her lifetime. This last option is oftentimes referred to as a “stretch” option. This bill would require that distribution be made by the end of the 10th calendar year following the year of death. Therefore, there are no RMDs. If no distributions are made during the first nine years, there will be a lump-sum distribution in the 10th year. IRAs left to younger beneficiaries will be distributed out over a shorter period of time, likely at higher tax rates. 

Why It May Be a Good Time to Amp Up Your ROTH Accounts

Before this bill, one of the advantages of the ROTH over traditional IRAs (or other pre-tax retirements), was that there were no RMD requirements for a ROTH IRA while the participant was alive. However, the distribution rules are the same for beneficiaries of ROTHs as for beneficiaries of traditional IRAs. Meaning, there is a mandatory start to distributions. The big difference is that the distributions to the beneficiary from the ROTH IRAs are nontaxable (assuming the ROTH IRA participant had met the five-year holding period). 

So, with the possibility of significantly shorter distribution periods, leaving traditional IRAs to beneficiaries may result in more tax over the distribution period, than under current law. Perhaps the participant can convert to a ROTH now at a lower tax rate? Ask your tax adviser to review this with you. 

Contact me today with questions or comments.