1. Repealing Age 70 ½ Limit for Making Traditional IRA Contributions Good idea. Given that people are working longer, this would be a welcome change. There are no age limits for making Roth IRA contributions so this proposal would allow the same for traditional IRAs. People making contributions to traditional IRAs after age 70 ½ would still be subject to RMDs in those same years, so some funds will have to be withdrawn each year, even as other funds will be contributed. This would also open up the ability to do more spousal IRAs (for a non-working spouse) for spouse’s who are over age 70 ½, doubling the IRA contribution for the couple.
2. Backdoor Roth Conversion Benefit Another benefit of eliminating the age 70 ½ restriction for making traditional IRA contributions is that it would open the door for more people (over age 70 ½) to do backdoor Roth conversions. There are no income limits on making traditional IRA contributions, but there are limits for contributing to a Roth IRA. For 2019, those phase-out limits are $193,000-$203,000 (married filing jointy) and $122,000-$137,000 (single).
3. Prohibiting the Use of Plan Loan Credit Cards Good idea! Plan loans in general often add to financial problems when these loans cannot be repaid, but using a 401(k) plan credit card added to that danger by making it way too easy to drain your 401(k). Imagine using your plan credit card for dinner or Starbucks — that can really add up.
4. Penalty-Free Withdrawals for Birth or Adoption This sounds good, but first, it’s limited to $5,000 and the distribution is still taxable. I worry that some people who might take advantage of this don’t realize this. They’ll get the $5,000, spend it, and then not have needed funds for the taxes the following year, when new parents will probably need more money. This sounds like a good provision, but it could end up adding to financial woes. One good idea here is that if the funds are later available, the funds withdrawn can be contributed back to a retirement account.
5. Increasing the Age for RMDs This is great idea and I wish they went further. They should have brought back an earlier proposal to eliminate the first $75,000 from RMDs. I would go even further and raise that to $100,000. That would eliminate the RMD complexities for more than half of the seniors subject to RMDs. But age 72 is a step in the right direction. At a minimum, it gets rid of the ridiculous confusion that the age 70 ½ brings to those beginning RMDs.
Killing the stretch IRA in the latest House and Senate retirement bills “would create unnecessary complexity for inheritors and planners,” according to IRA expert Ed Slott, and would be a “revenue loser” as investors would choose more tax-efficient strategies.
“Some larger IRAs would have to be paid in a short time after death, creating problems for parents who might worry about the funds not lasting,” Slott told ThinkAdvisor on Friday.
Further, “trusts could be set up, but still the IRA funds would be paid to the trust in a shorter period and get hit with high trust taxes on funds not distributed from the trust.”
To follow a conversation on the recent retirement bills between ThinkAdvisor executive editor Ronald Pechtimaldjian and Washington Bureau Chief Melanie Waddell on Monday, April 29, register here:
The House bill, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, limits post-death payouts to beneficiaries to 10 years, while the Senate Finance Committee’s Retirement Enhancement and Savings Act (RESA) of 2019 sets a five-year payout limit for balances above $400,000.
Lawmakers “think that’s going to pay for everything else. Most beneficiaries don’t even last the 10 years. They [lawmakers] think they’re going to get all this money,” he said. “I think it’s a revenue loser.”
By eliminating the stretch IRA, “I think it’s going to push advisors to provide better, more tax efficient options like doing life insurance instead, which is tax free, which you can push through a trust and create your own stretch.”
Slott reiterated his previous concerns that getting rid of the stretch IRA would also hurt Roth conversions for older people.
However, the provision is likely to pass, he said, because “there is no beneficiary’s lobby or people parading in front of the White House with ‘Save the Stretch IRA’ signs.”
As to the prospects for both bills getting through the House and Senate and passed into law, Slott opines that “there’s no hot-button issue that’s going to kill either one of them, unless they gunk it up with other things.”
Read the gallery above for five other areas of the bills where Slott gives a thumbs up or thumbs down.
— Related on ThinkAdvisor: