As most of us were welcoming family and friends to town for the holiday season, on December 19, 2020, Congress strongly passed on a bi-partisan effort: the SECURE Act of 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement. There have been some major changes here for people already in retirement and for those planning on passing some of their retirement assets to the next generation. The highlights of this bill include raising the Required Minimum Distribution, eliminating the ability to stretch out an inherited IRA by a non-spouse over the non-spouse’s life expectancy, implementing a ten-year rule for non-spouse inherited IRAs and lifting the contribution limitation age of 70 years old. Many other rules have changed, but for space sake, we will focus on these three.
A very significant change is the delaying of required minimum distributions (RMDs) until age 72. For those who don’t need this income, this may come as a welcome change. IRA owners who turned 70 ½ in 2019 are required to take their distribution by April 1, 2020 and continue distributions their 71st year. So, if you turned 70 ½ in May 2019, you will need to take your first RMD by April 1 and your RMD for age 71 by December 31, 2020, which will have both distributions this year. The charitably inclined may want to ask their advisors about utilizing a Qualified Charitable Distribution to satisfy RMDs. If you didn’t reach 70 ½ in 2019, then your RMDs do not start until the year in which you turn 72.
Historically, those with larger IRAs have been able to use the stretching provision in the Tax Code when naming non-spousal beneficiaries. What this meant is that the non-spousal beneficiary could withdraw an RMD based upon their own life expectancy and not the original IRA owner’s attained age. What this enabled non-spousal beneficiaries to do was to keep this Beneficiary Designated IRA in place for years, while only withdrawing minimal RMD to avoid paying taxes on this money in a short period of time. This allows for the IRA asset to continue to try to achieve maximum tax-deferred growth. The government has decided to eliminate this stretching provision and has replaced it with a ten-year rule. This rule states that there is no longer a stretching provision, and there is no Annual Required Distribution amount for the non-spouse. Instead, the ten-year rule states that the beneficiary of the IRA has ten years to withdraw the entire asset and pay taxes on it. This can be done in any format – yearly, monthly, all at one time, more some years than others. Beneficiaries of said IRAs will need to work very closely with their tax advisors and financial advisors to craft a specific withdrawal strategy that will minimize how this new income will affect their overall income taxes, and/or benefits from other government agencies.
Another provision that changed is the age restriction on contributing to traditional and Roth IRAs. Until 2019, the maximum age was 70. To contribute to an IRA, a taxpayer must have earned income. Now that the age restriction has been lifted, investors who continue to work part-time during retirement are able to continue to contribute to their retirement accounts indefinitely.
With all of these recent changes that have been implemented in the SECURE Act of 2019, I strongly encourage all investors of retirement age to determine how it will affect their own retirement plan, as well how it may impact their beneficiaries. There are many useful estate planning strategies that can help ensure that your money will get transferred to the next generation in a tax-efficient and most effective manner.
I hope your 2020 is off to an amazing start. Happy Valentine’s Day!800.338.4586 olvinvest.com The Durant 607 E. 2nd Ave., Suite 100 Flint, MI 48502 firstname.lastname@example.org
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OLV Investment Group is independent of Sigma Financial Corporation and SPC. *It is not possible to invest directly into an index. Past performance is no guarantee of future investment performance. This article is for informational purposes only and should not be construed as investment advice.