New Retirement Bill, the SECURE Act

By Dean Barber

June 20, 2019

JoAnn Huber, our CPA, learned about a fascinating new retirement bill that has passed the House and is likely to pass the Senate because it is believed that only six senators today are against it. So, it’s likely to become law. To set the stage, this new retirement bill could impact tax law.

Whenever we have tax law changes, the most important thing is to say, “Okay, what does it do to me? What are the opportunities that are now present for me?”

In English, What is the New Retirement Bill?

It’s called the SECURE Act. It has passed the House, and the Senate has a similar version. No one knows what the final version will be and if Trump will sign it, but there’s a pretty good indication that it is going to pass at some point. People reading about the new retirement bill in the press think it’s great because it postpones the start date for required minimum distributions (RMDs) to age 72. If you happen to still be working after age 70½, you can continue to make contributions to a traditional IRA. When we look at those two things, it sounds great!

The Ugly Side

However, there’s a nasty component to this new retirement bill, the SECURE Act – which I believe is the biggest money grab I’ve ever seen from a bill to go through the House of Representatives and potentially through the Senate. They’re saying you will no longer be allowed to do a Stretch IRA if you’re a non-spouse, a non-minor beneficiary, or not disabled. So, there are a few exceptions.

The SECURE Act’s Impact on Taxes

The House Version says if you have an IRA that you inherit, you’re going to have to take the money out within ten years. The Senate version currently is at five years.  If you have a $1,000,000 IRA that has to come out within ten years, that’s going to be a significant amount of additional income those beneficiaries are going to have to pay tax on. The other thing to look at is when people inherit IRAs it is often during their peak earning years, late 50s to early 60s when the parents die. So, you add extra income on to an already high-income base. It’s entirely possible that somebody is going to have their taxes go up to a higher bracket such as 32%, 35%, or even 37%.

Those tax rates don’t even include the impact of the state income tax, it doesn’t include the potential for a higher Medicare tax, it doesn’t include the potential to trigger the net investment income tax. There are many tax-related things that this rule could impact.

An Example

JoAnn and I were working on a scenario just this last week. We were examining what we’d do in the event the husband and wife passed away. Due to the earnings the kids have today and stretching their IRA out over five years, the tax rate was going to be right around 50%.

When you put your money into the IRA, I’ll almost guarantee you weren’t earning at a rate to be paying at 50%; so, you didn’t get a 50% deduction when you put the money in there. Most people when they were putting money into their 401(k) plans were getting a federal tax deduction in the 28% tax bracket.  This was kind of the popular bracket for a long period of time which came out of the Tax Reform Act of 1986. Under the proposed versions of the new retirement bill, the money in your IRA could potentially come out to your kids, your grandkids, and they lose half of it to taxes. That’s why I said it’s the biggest money grab I’ve ever seen. It’s crazy.

Catch this Weekend’s Show

Don’t miss this weekend’s episode of America’s Wealth Management Show where Dean Barber, Bud Kasper, and JoAnn Huber discuss more on the new retirement bill and examine enemy within keeping you from your retirement goals. As always, we’re available to prepare for you a personal financial plan, just call 913-393-1000 or schedule a complimentary consultation below.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.