Retirement Planning

Congress Is Making Changes to Your Retirement Accounts: How Will It Affect You?

Many people like to joke about how Congress always drags its feet on important pieces of legislation or on important societal issues. One need only look at the crisis facing Social Security, something that Congress hasn’t focused on at all, to see a crystal clear example of it. But every now and then Congress makes a sudden move that changes and upends everything. That’s what’s happening right now.

Even though Congress is more focused on impeachment right now, it still has to pass a federal funding bill to keep the government open. Otherwise, the government is set to shut down again after Friday. But as part of that massive government spending bill, Congress has slipped in legislation that will make major changes to your retirement accounts.

Tax-advantaged retirement accounts have been beneficial to millions of Americans, who have used 401(k), 403(b), TSP, and IRA accounts to save trillions of dollars for their retirement. But Congress has long looked at the trillions of dollars sitting there in those accounts accruing tax-free gains and wondered how it could start taxing that money sooner. Now it has acted to do that.

The legislation that was slipped in is known as the SECURE Act, and it was heavily lobbied for by insurance companies. That’s because it loosens requirements on employers who offer annuities as part of their retirement plans, meaning that insurance companies will now be able to sell more annuities to investors. While insurance companies welcome that, it’s not great news for investors since annuities have so many drawbacks. And the SECURE Act itself is intended to result in greater tax income for the government. Here are some of the most important ways that the SECURE Act will affect you and your retirement savings.

RMD Age Raised to 72

Investors who hold IRA and 401(k) accounts know that they have to start making required minimum distributions (RMDs) from their retirement accounts once they turn 70 ½. Investors who haven’t calculated how much those RMDs will affect their taxable income could get a shock once they realize that those RMDs will push them into a higher tax bracket, particularly if they’re still working at age 70 ½.

The SECURE Act will raise the age for RMDs to 72, giving workers more time before taking their distributions. For those who can afford to wait until age 72, it can also help them boost their savings an extra year-and-a-half.

Eliminate Age Limit on IRA Contributions

Right now contributions to a traditional IRA (pre-tax dollars) are limited to those under age 70 ½. Once you reach age 70 ½ you are forbidden from contributing to a traditional IRA, although you can still contribute to a Roth IRA (post-tax dollars).

The SECURE Act would change that and eliminate the age limit on contributions to a traditional IRA. That would allow older workers to continue contributing pre-tax dollars from their paychecks to their IRA accounts.

Eliminate “Stretch” IRAs

Here’s where the government really hopes to get its money. Currently those who inherit an IRA are allowed to take distributions from the IRA over the lifetime of the beneficiary. So if you die at age 85 and leave your IRA to your 55-year-old son, he could withdraw money from that IRA over the course of his lifetime. If he lived to age 85 too, that means he could keep withdrawing money for 30 years.

The new guidelines under the SECURE Act require that all non-spouse inheritors of IRAs must distribute the assets from their inherited IRAs within 10 years. That could cause a huge tax hit to children inheriting their parents’ retirement accounts.

Take the example of that 55-year-old son above. He’s probably in his peak earning years, so forcing him to take distributions over the next 10 years will mean that he’s paying more taxes on those distributions than if were able to wait 15 or 20 years to take them. That hurts children who inherit their parents’ IRAs, while filling the government’s coffers.

What Effects on Gold Investors?

So what effects will this have on those who invest in gold, particularly those who invest through a gold IRA? The two beneficial effects will be those on raising the RMD age to 72 and eliminating the limit on contributions after age 70 ½. That will allow investors who want to continue investing in gold into their 70s, and who don’t want to have to take distributions any more than they have to, to continue investing in gold through their gold IRAs.

The negative effect will be that gold investors who hoped to leave their IRAs to their children will now have to account for the tax consequences of doing that. The elimination of the stretch IRA will upend retirement and estate planning throughout the country, so financial advisers will likely be busy learning about the new laws and advising their clients on how to respond.

If you plan to draw down the entirety of your IRA during your lifetime, the new legislation may not affect you. But if you were hoping to leave your gold IRA to your heirs, you’ll definitely want to consult your financial adviser about your investment strategy going forward.

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