Last week the House of Representatives passed a new bill by an overwhelming majority revising the treatment of key parts of American retirement systems entitled the Setting Every Community Up for Retirement Enhancement or “SECURE” Act. The bill was passed by a massive majority of 417-3 and signals from the Senate and President indicate that the law would likely pass.
There are several key changes proposed in the SECURE Act and two of them may have interesting consequences for Americans abroad:
Required Minimum Distributions (RMDs) would be delayed from age 70.5 until age 72 in Individual Retirement Accounts and 401(k)s. Meaning those who’ve contributed to these plans would be able to defer taking money out for an additional 1.5 years. Relatedly, there would no longer be an age cap on the ability to contribute to an Individual Retirement Account (IRA) or 401(k).
In order to pay for the decreased revenues, the treatment of IRAs and 401(k)s inherited by individuals other than the spouse would be changed. Rather than being allowed to “stretch” the withdrawals from an IRA across the inheritor’s full lifespan, under the current terms of the legislation, such withdrawals would be limited to a 10 year time frame.
For many Americans retiring abroad-- particularly in countries that either don’t tax U.S. assets or have the Roth provisions built into their treaty, this may give them a larger and more sustainable window to convert their assets to a Roth IRA. The shorter window for inherited IRA accounts would also mean that if the heirs lived in the United States (or in countries where the Roth was respected), a Roth IRA would likely make even more sense in the case that they either retired early or had a sustained period of lower income.
There are several additional points and changes to retirement plans in this bill, including the fact that the bill would make it easier for people to annuitize their 401(k) plans and convert their cash balance into a consistent retirement stream of monthly payments-- essentially more like a traditional defined benefit pension. In the blog on our Walkner Condon website, we discuss our concerns about how this change might affect many Americans from the perspective of costs and fees.
In addition to the added costs, this legislation could also raise the question for Americans abroad about how these 401(k) annuities might be treated from the question of tax treaties. Many of the United States’ tax treaties have a separate sections for annuities and the tax rules governing annuities (where they are taxed for instance) are frequently different for the tax rules regarding retirement plans (either 401(k)s or IRAs). In which case, it becomes yet another case of the ongoing grey areas that face Americans abroad when they do their taxes. Such complications could also extend to the new, possible carve outs in the bill for withdrawals for additional (non-retirement) expenses as well.