New IRA Rules May Help Working Seniors

Working Senior“I’m just a bill, I’m only a bill, sittin’ here on Capitol Hill,” I sang coming down the stairs the other day heading to breakfast. My 15 year old daughter, Phoebe, looked at me like I was crazy, just as an adolescent teenage daughter can. “You are weird Dad, what are you singing?” And I thought I was being cool.

As a father of three teenage daughters, I quickly have learned that there are a lot of cultural differences between different generations. Saturday morning cartoons were a mainstay of my generation, for example, and now they’re mostly unknown. And because of it, our kids haven’t been exposed to the creative educational cartoons they’d run in between shows, like Schoolhouse Rock. I was humming a line from a famous Schoolhouse Rock cartoon, which taught kids of my generation how bills went through Congress to become laws. Phoebe, meanwhile, looked like I’d finally lost my mind for good.

What got me thinking about that old song was the Family Savings Act of 2018 (H.R. 6757), a pending piece of legislation that’s now bouncing around Capitol Hill as part of a packet of bills that Congress has called “Tax Reform 2.0.”

The bill broadly addresses issues surrounding retirement savings and other savings accounts. Some of the changes proposed are aimed at older IRA owners, like my friends who I’ll call Rod and Greta.

Rod’s situation is not unique to his generation. He turned 70 earlier this year, continues to work part-time, and wants to continue to his traditional IRA . . . but he can’t. Under the existing law, you can’t contribute to your traditional IRAs anymore in the same calendar year as you turn 70 ½.

If it goes through in its current state, The Family Savings Act will finally repeal the age restriction associated with traditional IRA contributions. That’d be a significant benefit to Rod, Greta, and other folks who want to continue to contribute to IRAs even as they get older.

The age restriction associated with traditional IRAs does not exist with Roth IRAs, SEP or SIMPLE IRAs – as long as you’re otherwise eligible by earning income within the guidelines set by the IRS. It’d be a big relief for many retirees to see traditional IRAs follow suit.

The Family Savings Act presents another potential benefit for couples like Rod and Greta: It paves the way for easier “back-door” Roth IRA conversions. Roth IRA’s are appropriate investment vehicles for some individuals seeking to lower their tax profile in retirement, but the IRS imposes income limits on individuals and couples looking to contribute to them.

In the past, Rod and Greta have made contributions to traditional IRAs and converted them to a Roth – a process known as a back-door Roth conversion. Backdoor Roth conversions have been popular financial instruments for a while, but their legitimacy has been a bit of a gray area. That changed earlier this year following a conference committee report by Congress which legitimized the procedure.

They are ineligible to do that now that Rod has turned 70½ and can no longer make traditional IRA contributions. If the Family Savings Act passes in its current form, the age restriction on traditional IRA contributions disappears with it.

Where Rod and Greta are within their financial lifecycle, they will begin to take Required Minimum Distributions for their tax-deferred retirement accounts. Currently, all of those distributions will be taxed as ordinary income. Another critical piece of the proposed legislation built into the Family Savings Act would exempt Required Minimum Distributions (RMDs) for total retirement balances of $50,000 or less.

This is great new since many retirees find RMD rules and calculations fraught with confusion, and Rod and Greta are no exception. This proposal would simplify the confusion by enabling Rod and Greta to withdraw whatever amount they choose to from their combined retirement accounts, with no forced RMDs from specific accounts, complicated formulas or potentially expensive penalties to deal with.

One of the other proposals for the Family Savings Act would be the creation of Universal Savings Accounts (USAs). In short, the Universal Savings Account would become a flexible financial vehicle that would encourage individuals to save more.

Unlike some of the other proposed changes, this doesn’t just affect folks like retirees or people approaching retirement like Rod and Greta. Individuals of any age will be able to open and contribute to a USA. USA’s work a bit like Roth IRAs – contributions are made on an after-tax basis, and earnings and distributions would not be taxed. But unlike Roth IRA’s, there are no age requirements for penalty-free distribution.

Under the current terms of the Family Savings Act, Individuals could deposit up to $2,500 per year to their USA (not to exceed their actual income for the year). Earnings and distributions from those USAs would not be taxed. Furthermore, amounts can be withdrawn from the USA at any time, for any purpose whatsoever.

Rod and Greta are doing all the right things to make sure that they’re going to be comfortable once they both stop working and start enjoying their retirement years. Hopefully, these legislative changes will make it just a bit easier for them, and for you, to do so.

Schoolhouse Rock’s chorus ends:

“And if he signs me, then I’ll be a law.
How I hope and pray that he will,
But today I am still just a bill.”

As I write this, the Family Savings Act is just a bill, but it’s expected to be voted on shortly. If it passes, you’ll be empowered beginning in 2019 to do more to save for retirement and to withdraw appropriately. So keep an eye and an ear out on the news headlines to stay abreast of the latest.

Remember, always be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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