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Like most Americans, you have probably just breathed a sigh of relief that the tax season is over and your taxes (hopefully) are filed. Thinking ahead to changes in tax law for 2019 and beyond is likely the last thing you want to do right now, but planning ahead could benefit you later, as there are changes to federal tax law on the horizon, including the SECURE Act.
The SECURE Act was recently passed by the House Ways and Means Committee. This act could have a significant impact on American workers’ retirement plans, including Individual Retirement Accounts (IRAs). If you currently contribute to an IRA, you are probably aware that once you are a retiree aged 70 ½ or older, you must begin taking Required Minimum Distributions (RMDs) annually from your IRA.
The aspect of the SECURE Act that will probably affect the most people saving for retirement will change the rules for RMDs by pushing the starting age back to 72. In addition, workers older than the previous starting age of 70 ½ would be allowed to keep contributing to their IRAs.
Trade-Offs With the SECURE Act
That sounds like good news: savers don’t have to start taking distributions until later, and can, if they wish, keep saving longer. The downside is that Congress intends to make that possible by shortening the time period during which beneficiaries are able to take withdrawals from an inherited IRA.
As the law stands, beneficiaries can take RMDs based on life expectancy. As a result, a beneficiary who inherited the IRA from a deceased older relative might need to take only as little as 2% as an RMD from the account each year. They could then allow the remainder of the account funds to compound, tax-deferred, until they themselves retired, at which point they might choose to increase distributions.
If passed by the full Congress, the SECURE Act would require that the entire IRA be withdrawn by a beneficiary who inherited it within ten years, rather than stretching distributions out as they are now able to do. Naturally, that means that withdrawals in a given year would likely be larger, and would probably generate more tax revenue.
The SECURE Act received unanimous bipartisan support within the House Ways and Means Committee, but it has yet to pass the Senate, which has its own version of the law.
The SECURE Act received unanimous bipartisan support within the House Ways and Means Committee, but it has yet to pass the Senate, which has its own version of the law. That means that the bills will probably undergo some changes before they become law. However, with strong support from both parties, it is likely that will happen.
Changes to Payroll Withholding
The IRS has been busy making changes, too. The Tax Cuts and Jobs Act (TCJA) which brought the most significant tax reform in decades highlighted a need to increase the accuracy of payroll withholding. Following the enactment of the TCJA, withholding tables were revised by the IRS, reflecting lower taxes for most Americans. However, the older W-4s counted on claiming exemptions, which were eliminated by the TCJA.
The good news is that the updated version of the forms is probably going to be much more accurate. The bad news is that it is almost certainly going to be more complicated. The new W-4 is currently in draft form, and requires employees to include interest and dividend income, tax credits, itemized deductions, and more. As you can imagine, these requirements did not go over well, and revisions are in the works. If the revised version gets a better reception, it would be in use for 2020.
It is important to have the right amount of withholding in order to avoid penalties or having to write a big check for taxes next time April 15 rolls around. Here’s hoping the IRS can make achieving accuracy less painful than it looks right now.
If you have questions about tax or retirement planning, it’s never too early to consult with an attorney experienced in these matters. We invite you to contact our office to schedule a consultation.
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