New Year….New Retirement planning and tax changes

Blog post #425

In late December, as part of major spending legislation, Congress passed what is called the SECURE Act, which makes numerous changes to retirement plans, particularly regarding distributions after an account owner dies.

There are many detailed items in this legislation. We will provide you with an overview of changes that will affect most people.

The SECURE Act did not change how much you can contribute to a 401(k), IRA or planning opportunities for those who own business or are self-employed. We encourage you to consult with us about your retirement planning, investment choices and related matters.

Changes to distributions….end of the Stretch IRA, mostly

If you inherited retirement assets from someone who died prior to 2020, the SECURE Act changes do not impact those inheritance distribution rules at all.

For someone who dies after 2019, fewer beneficiaries will be able to stretch the IRA/retirement assets over their life expectancy, as you could under the prior law.

Going forward, most beneficiaries, other than a surviving spouse, will have to take inherited retirement distributions by the end of the 10th year following the year of inheritance. If you inherit such assets, there are no required distributions for years 1-9, but you will need to distribute all the assets by the end of the 10th year.

There could be planning opportunities to evaluate, as the tax impact on when you take these taxable distributions could change depending on the year, your other income, and decisions like when you begin receiving Social Security. Thus, if this impacts you, this should be something to discuss and get advice from your financial and tax advisors.

If you are a surviving spouse, you will continue to be able to take retirement distributions over your life expectancy and you will not be subject to this new 10 year rule.

Have you named a Trust as a retirement beneficiary?

If you have not named people (such as a spouse, child or other relative), but have named a Trust as an IRA, 401(k) or other retirement plan beneficiary, or successor beneficiary, you should review this, as the SECURE Act may limit your distribution flexibility. It is possible a Trust may only provide for distribution in the last year, and not earlier, depending on your Trust document wording.

This could be a bad result, as it potentially limits the beneficiaries from being able to receive the inherited assets earlier, in years 1-9, even if they need the money.

If you have named a Trust as a retirement plan or IRA beneficiary or successor beneficiary, you should consult with your estate planning attorney.

Required Minimum Distribution Age change

Prior law was that you had to begin taking retirement plan distributions by April 1st after the year in which you turned 70 1/2. Yes, that’s simple and logical. Not really!

Under the new law, you must begin taking the required minimum distribution (RMD) by age 72. Simpler. But it’s actually by April 1st in the year after you turn age 72. And if you wait until the year after you turn age 72, then you have to take a 2nd RMD in that year, the year you turn 73. Again, more potential opportunities for planning, so talk to us about these issues.

And, if you turned 70 1/2 by December 31, 2019, you will follow the old rules, not the new age 72 rule. You would need to take an RMD for 2020 and years after.

Qualified Charitable Distributions (QCD) still allowed

For those who do not need all of their retirement money for their living expenses, up to $100,000 of your Required Minimum Distribution each year can be directed to a charity and it is not considered taxable income.

The SECURE Act keeps the age at which you are eligible to make QCDs at age 70 1/2, so if you fall within the 70 1/2 to age 72 group now, and have the financial ability and charitable intent, this could be planning opportunity for you.

Other Items

  • The new law removes the age limit for contributing to a traditional IRA. If you have earned income and are older than 70 1/2, you are now eligible for further IRA contributions.
  • If you incur birth or adoption expenses, you and your spouse, as applicable, will each be eligible for a $5,000 qualified distribution from a retirement plan or IRA. The distribution would be taxable, but not subject to the additional 10% early withdrawal penalty.
  • The SECURE Act changed the tax law related to the kiddie tax, lowering the tax rate back to the parent’s rate. The Act also reduced the threshold for medical expenses to be deductible, back to 7.5% of your Adjusted Gross Income for 2019 and 2020 only.

Concluding thoughts

As you can see, laws and rules are always changing, and these changes can impact your financial future. Change can lead to opportunities and pitfalls.

Please contact us if you have questions about any of these matters. That is what we are here for and the value we provide to you.

Also, please feel free to share this information with others who you think would benefit from reading this information, as well as our advice and guidance.

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