SECURE Act: How Retirement Reform Impacts Your IRA & Tax Planning

A retirement reform bill signed by President Trump includes some positive provisions for workers – but at least one big downside that could hurt wealthier retirees.

The law – known as the SECURE Act – cleared both houses of Congress last week. Among its more well-known provisions are: increasing access to retirement plans, extending the age limit by which people would be allowed to stash money into IRA accounts and delaying when people would be required to take required minimum distributions to 72, from 70 1/2.

As previously noted by FOX Business, there is at least one measure that could seriously impact retirees and their savings. That is the elimination of stretch IRAs.

The new proposal stipulates that most non-spouses who inherit an account must drain it within 10 years of the owner's death, while the current law allows them to stretch it out over a lifetime.

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Stretch IRAs are an estate planning strategy – a way that people can pass on their retirement funds to their kids, grandkids or other beneficiaries. For a child, for example, the funds (under current law) can grow tax-deferred or tax-free over the course of his or her lifetime, while taking smaller required minimum distributions along the way (based on age and life expectancy). Those distributions, however, are subject to income taxes.

Since larger distributions will typically need to be made during the 10-year timeframe, the tax liability will be larger, John Iammarino, the principal and founder of Securus Financial, told FOX Business.

"If you are leaving money then you might want to have some different plans … You could be making the IRS your biggest beneficiary," Iammarino said.

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Reuters

President Obama made a previous attempt to get rid of stretch IRAs, which generally benefits well-to-do families who have accumulated wealth.

Otherwise, the law makes it easier for companies to band together to offer multi-employer plans, while requiring businesses to allow some part-time workers to participate.

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Multi-employer plans are currently available, but the legislation would change one significant rule that might encourage more businesses to participate. The so-called "one bad apple" rule refers to the fact that if 10 employers go into a plan together, and one person doesn’t follow the rules, the whole group will suffer. Businesses would be allowed to outsource two fiduciary rules to address that dilemma.

The plan also calls for an annuity option in retirement plans which are fixed sums paid out over a lifetime.