Are Changes Coming to the IRA Rules?
By Sarah Brenner, JD
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After last year’s passage of the Tax Cuts and Jobs Act, which overhauled the tax code, you might think Congress would be done with tax legislation for a while. That is not the case. While Republican efforts to unleash as second round of tax reform are likely to hit Democratic resistance and are not widely seen as likely to succeed this year, proposed legislation focusing on retirement plans may have some bipartisan support and a decent shot at becoming law. The “Family Savings Act of 2018” (H.R. 6757) includes provisions that would change the rules for your IRA.
Allow Traditional IRA Contributions at any Age
The IRA rules can be strange. While there are no age restrictions for contributing to a Roth IRA, under current law a contribution cannot be made to a traditional IRA for the year an IRA owner turns 70 ½ or for later years. This restriction does not apply to SEP or SIMPLE IRAs, where contributions can continue to be made despite age if the individual is otherwise eligible.
The proposed legislation lifting the age restriction would enable you to continue to fund your IRA if you are still working after age 70 ½. This is a change that makes sense, given that people are living longer and that these days many people continue to work a least part-time in retirement. The change would also mean that those who are 70 ½ or older could take advantage of the back-door Roth IRA conversion strategy, that is currently unavailable to them because they are unable to make traditional IRA contributions due to their age.
No RMDs for Total Retirement Balances of $50,000 or Less
Don’t like taking your required minimum distribution (RMD)? Well, you might get a break, depending on how big your balance is. The proposed legislation would eliminate RMDs for those with total retirement account balances of $50,000 or less. The $50,000 amount is based on the value of all retirement funds at the end of the year and is to be adjusted for inflation for years after 2019. The exemption would only apply to RMDs during the account owner’s lifetime. It would not apply to RMDs from inherited IRAs or plans.
Penalty-free Retirement Withdrawals for Birth or Adoption
The list of exceptions to the 10% early distribution penalty has gotten longer over the years. The proposed legislation would add yet another exception. This exception would be for early withdrawals for births or adoptions and would be limited to $7,500 overall. The distribution would have to occur within one year from the birth or adoption. In addition, the distributions taken under this proposal could be repaid in a future year as a rollover.
Universal Savings Accounts
The proposed legislation would also add a new type of tax-advantaged account to the tax code called a Universal Savings Account. These would be accounts that could grow tax-free like a Roth IRA, but with fewer restrictions. The annual contribution would be limited to $2,500.
As Congress wraps up its 2018 legislative session, keep an eye on these retirement proposals. No one can say for sure what will happen, but they have a real shot at becoming law and your IRA could be affected. Stay tuned to the Slott Report for any future legislative developments.