Congress just agreed to a bipartisan appropriations bill that will help avert another government shutdown. However, attached to the spending bill is a piece of legislation called the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which passed the House with a 417-3 vote earlier this summer.
Honestly, the passage of the SECURE Act came as a bit of a surprise as it appeared to be derailed during the fall. Now, just a few weeks before the end of the year, Congress is changing major tax laws implicating 2019 and especially 2020 going forward.
The most important provision of the SECURE Act – removal of the stretch RMD provisions – is a tax revenue generator, meaning a tax hike on many Americans. This goes into effect Jan. 1, 2020, assuming President Trump signs the bill into law, which seems all but a forgone conclusion.
The removal of the required minimum distribution (RMD) provisions for stretch IRAs for many beneficiaries will cause chaos for certain types of trusts written prior to this bill. Trusts written as so-called “pass-through trusts” could have to be reformed to match up with the current SECURE Act language. If not, existing trust language could restrict access to funds to heirs of trusts listed as the beneficiaries of IRAs and cause massive tax bills down the line.
Instead of being able to stretch RMDs out over the life of a beneficiary, many will have to take all RMDs of a retirement account by the end of year 10 after an account owner passes away. This can push higher RMDs into the prime working years – and highest tax years – of a beneficiary’s life.