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Potential New Retirement Legislation
If you weren’t aware, there is proposed legislation currently in Congress that many believe has a significant probability of becoming law later this year. We don’t try to predict the future on these things, but any proposed new legislation that may impact our clients or their planning needs is on our radar. The Wall Street Journal called it the most significant change to retirement legislation since 2006, which drastically changed some of the provisions applying to 401(k) plans. While I hadn’t started my career by 2006, these changes would be significant, and certainly create some planning implications for our clients.
What’s Changing: There are some big changes coming to 401k plans. While that won’t affect most of our clients, it is an attempt to shore up what some have lamented as the “Retirement Crisis” our country is currently facing. This would include the automatic escalation of employees contributions each year, the ability for small businesses to band together to provide 401k plans as well as plan statements to disclose how much monthly income the amount they have saved might provide. All of these things we view as positive and should go to help the workers of this country save more for retirement.
For our clients, there are some big changes that are both potentially positive and negative depending on your own individual circumstance. The first revision would repeal the maximum age for traditional IRA contributions. Currently, that age is 70.5 Given that so many people continue to work even into their 70’s, it makes sense to also give them the ability to continue to make deductible contributions to their retirement accounts. Along with the removal of the maximum age, there is a proposal to move the starting age for RMD’s (Required Minimum Distributions) from 70.5 to 72. While this may seem like a nuance, having another year before you are forced to take a minimum distribution can allow for additional planning opportunities such as Roth conversions.
That is most of the good news. Like any new piece of legislation there is a part that usually goes to pay for any lost revenue. Often legislation is more easily passed when it can be close to “revenue-neutral.” In order to pay for some of the new pro-saver legislation that would cost the government revenue, they are proposing to remove the “IRA Stretch” provision. When a non-spouse inherits a retirement account (IRA, 401k, 403b) they have to choose how to distribute the funds. Much like an RMD. A popular method of distribution was to “Stretch” the required distributions over the individual who inherited the funds lifetime. Typically, that would result in a lower tax liability and a longer preservation of the inherited asset. The new law is proposing to require those funds to be distributed over the course of 10 years. No more stretch. This would require some additional planning for our clients potentially regarding their estate plan and beneficiaries. Taking a large IRA balance out over 10 years, can cause some significant tax implications for the individual who inherited that asset.
While this law is still moving through Congress, and there will be additional mark-ups and removals it does appear at this point to potentially become law at some point later this year. It has wide bi-partisan support as the current state of retirement preparedness in this country could use a little bit of help. As always, we are paying close attention to any new legislation and will be reviewing how it will impact you, our clients.
The views are those of Robert Jeter CFP ®, CRPC and should not be construed as specific investment advice. Robert regularly speaks to the public on behavioral finance and how it affects investment decisions. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
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Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.