New Law Could Change Rules for IRA Withdrawals

If you have money in a traditional IRA or 401(k), you probably already know that eventually you’ll have to take that money out and pay taxes on it. But the rules for taking required minimum distributions (RMDs) have always been confusing, especially because they require you to start tapping your accounts based on your half birthday—age 70½. On May 23, the House of Representatives passed a bill that would simplify the rules and give your savings a little more time to grow tax-deferred. The Senate is considering a similar bill. It hadn’t voted at press time but is expected to vote on it soon.

The SECURE Act (Setting Every Community Up for Retirement Enhancement) would raise the RMD age to 72 and allow people of any age who have earned income to contribute to traditional IRAs. The changes would be particularly helpful for the growing number of people who are working into their seventies, says Ed Slott, founder of IRAHelp.com.

Under current law, you can’t contribute to a traditional IRA after age 70½. You can contribute to a Roth at any age, as long as you have earned income from a job, but your adjusted gross income must be less than $122,000 if you’re single or $193,000 if you’re married filing jointly to make the full contribution in 2019. The proposed change would allow older workers who earn too much to contribute to a Roth to put money in a traditional IRA, which they could then convert to a Roth, Slott says. If that is their only traditional IRA, they would only owe taxes on any earnings when they convert, and the money would grow tax-free after that. (The tax situation is more complicated if you own additional traditional IRAs.)

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Retirees may be less enthused about a provision in the bill that would generally require children and other non-spouse beneficiaries to withdraw money from an inherited IRA within 10 years. Now, those beneficiaries can spread withdrawals over their life expectancy and stretch out taxes on the money (spouses can roll an inherited IRA into their own IRA and delay withdrawals until they take RMDs).

The House bill passed with bipartisan support. If the bill passes in the Senate, it will be the first major legislation affecting retirement plans in more than a decade.

Most of the SECURE Act’s provisions are “common sense, widely supported changes,” says Alan Glickstein, senior retirement consultant with benefits consultant Willis Towers Watson.