The Retirement Enhancement and Savings Act of 2016 an What it Means For You
For years, hard working couples have maximized their 401(k), 403(b), and IRA contributions for two important goals: 1) Income in retirement, and 2) efficient generational wealth transfer.
The latter goal may need to be readdressed in reaction to a portion of the proposed legislation Retirement Enhancement and Savings Act of 2016 (already passed unanimously by the Senate Finance Committee in September 2016). While this rule would still need to pass through the House and Senate, the bill would require balances in many inherited IRAs and 401(k) plans to be distributed within five years of the saver’s death.
This Act would dramatically change the current laws that allow beneficiary IRAs and 401(k) plans to be distributed over the course of lifetimes. Similar proposals have been suggested in the past, but with the national deficit ballooning into the trillions of dollars, proposals like the Retirement Enhancement and Savings Act of 2016 seem more likely to gain traction.
Even with the proposed rule change there are suggested exclusions. The most important being:
Spouses inheriting an IRA would not be exposed to the provision, and
The rule would only relate to balances above $450,000 at the time of death.
$450,000 may sound like a lofty number, but this likely effects many American retirees and pre-retirees as this provision is expected to generate over $3,180,000,000 (that’s $3.18 billion) over 10 years.
As an example, an individual who saves $10,000/yr into their 401k from the age of 30 through retirement at 65 will build an account balance greater than $1,250,000 with a 6% annual growth rate. Without proper planning this could create required minimum distributions in excess of $160,000 per year under the new proposed legislation. Even worse is that depending on the tax bracket of the beneficiary, the result could be over $250,000 of your hard earned dollar going back to the US government instead of to the benefit of your beneficiaries.
Luckily, there are solutions to combat against such potential changes. These solutions come in the form of Roth Conversions, Charitable Trusts, Annuities, and other unique planning opportunities.
If you could be affected by this potential legislation we should talk!