Congress is considering changes to IRA rules, and some aren’t happy

A federal bill being promoted as an enhancement for owners of IRAs and retirement plans would raise the age for taking required minimum distributions from accounts and allow workers of any age to continue making contributions.

But a Squirrel Hill-based retirement planning expert calls the bipartisan overhaul to the retirement system “a stinking pig with a bow.” He believes the bill’s fine print spells massive income tax acceleration for families who inherit such accounts.

“The consequences of this bill will be devastating to people who have worked hard their entire lives, played by the rules and accumulated significant amounts of money in their IRAs and retirement plans,” said James Lange, owner of Lange Financial Group.

The change could mess up many people’s plans, he said. “This proposed massive acceleration of taxes really betrays those conscientious savers who socked money away under the assumption that they would be able to pass that money on to children in a tax efficient manner.”

With an inherited IRA, beneficiaries have the opportunity to “stretch” out the account’s proceeds over his or her life expectancy.

This gives the beneficiary more time to take advantage of tax-deferral status of the IRA assets. For example, if someone were to inherit an individual retirement account at age 53, that person would have a life expectancy of 31.4 years to withdraw the money and pay taxes on it in fractional amounts.

Under the proposal, formally known as the Setting Every Community Up for Retirement Enhancement Act, the entire IRA or retirement plan would have to be distributed within 10 years of the death of the original owner.

There are parts of the bill that many see as improvements.

Alex Kindler, a partner at H2R CPA in Green Tree, said he believes the line item that increases the age from 70.5 to age 72 for starting to take required minimum distributions from retirement accounts is probably the most significant benefit to taxpayers. It gives them an additional year and half to let their money grow tax-deferred.

“For those who have the wherewithal not to need to take the money out of their retirement accounts for living expenses, it gives them more money in retirement — more money they could potentially leave to their heirs,” Mr. Kindler said.

He said one of the ways Congress plans to pay for the

retirement plan enhancements is to shorten the term of an inherited IRA to 10 years. That means the government gets the tax revenue quicker.

For his part, Mr. Kindler believes the stretch IRA was never much of a benefit to people who were less well-off.

“If you were not so well-off and needed to spend the money for debt or living expenses, you usually cashed in the IRA because you had an immediate need for the money,” he said.

Other provisions in the House bill would allow:

• Long-term part-time workers to participate in workplace 401(k) plans.

• More annuities to be offered in 401(k) plans.

• Parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of a birth or adoption for qualified purposes.

• Parents to withdraw up to $10,000 from 529 plans to repay student loans.

According to the Washington, D.C.-based Investment Company Institute, as of Dec. 31, 401(k) plans held an estimated $5.2 trillion in assets and represented 19% of the $27.1 trillion in total U.S. retirement assets in employer-sponsored retirement plans for private and public-sector employers.

The House of Representatives passed the Secure Act of 2019 in late May by a 417-3 vote. It will now go to the Senate for a vote.

Meanwhile, the Senate also is proposing changes to the “stretch” rules.

In April, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, DOre., reintroduced their Retirement Enhancement and Savings Act. The Senate version proposes an even shorter distribution deadline of five years.

The Senate distribution rule would soften the blow somewhat by exempting IRA and retirement plan balances of $400,000 or less from the requirement.

“Presumably, if the Senate goes on to pass their version, the House and Senate will have to compromise on the details,” Mr. Lange said.

The proposed laws on inherited IRAs do not apply to surviving spouses.

Surviving spouses may still spread taxes due on IRAs and retirement accounts across their life span or roll the money into another retirement account. The proposed rules also would not affect Roth IRAs because taxes on those accounts already have been paid with after-tax income by the account owner.