New proposal triggers estate plan review

The Internal Revenue Service (IRS) is considering a new rule that will impact retirement plans. The rule specifically addresses IRAs.

What piece of legislation?

The SECURE Act is gaining momentum within Congress. The proposal passed the House of Representatives in May and is now under consideration by the Senate. The proposal focuses on retirement reform. Key changes include:

  • Small business tax credits. The proposal would allow small businesses additional tax credits for offering retirement plans.
  • Multi-business plans. The act also includes a provision that would ease the ability of businesses to work together to offer a plan. This is achieved by easing the “bad apple” rule that punishes all businesses if one within the group fails to abide by the rules.
  • Part-time employees. As currently written, the proposal also encouraged employers to allow part-time employees the ability to participate in retirement plans.

So far, the changes appear beneficial. However, one provision within the proposal that warrants careful consideration involves an extension of the contribution threshold for IRAs to 72. If taxpayers are not wise, this could result in receiving distributions while in a higher tax bracket.

Tax professionals have also voiced concern about the proposed removal of stretch IRAs. This type of IRA allows a non-spouse recipient to stretch the distributions over their lifetime. Removal of this form of IRA would result in a government requirement for a nonrecipient spouse to drain the IRA within 10 years of receipt.

What does this mean for estate plans?

It may be wise to review your estate plan to determine any potential impact of the proposal if it becomes law. A prompt review will provide time to make changes as needed.

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