Gennadiy Todd, Financial Planner
A new tax law, recently enacted on December 20th, has a few minor impacts for all and a few major challenges for some. Like most tax laws, there are plenty of nuances to make things complex. Here is our first understanding of the provisions in the Setting Every Community Up for Retirement Enhancement Act (SECURE) that are more likely to affect our clients.
Required Minimum Distributions: After a certain age, retirement account holders are required to begin withdrawing a certain minimum amount from their pre-tax retirement plans each year. The new rules in the SECURE Act are meant to reflect better longevity allowing taxpayers to save longer and take out their savings more slowly.
Leave it Longer: Before SECURE, pre-tax retirement account holders were required to begin these distributions in the year they turned 70½. Under the new law anyone who wasn’t already required to begin these withdrawals can wait until age 72 to begin these distributions if they like.
Withdraw it More Slowly: Anyone taking required minimum distributions, either under the old rules at age 70 ½ or under the new rules at age 72 will need to use new guidelines to calculate their required amount beginning in 2021. It shouldn’t be difficult for us to apply these new guidelines when they are published, and we expect them to allow for a slower pace of distribution.
Maybe Even Contribute: In the past, deductible IRA contributions weren’t allowed after taxpayers reached 70 ½. Under SECURE there is no longer an age restriction on deductible contributions. If you or a spouse have earnings and otherwise qualify you can make a deductible contribution and then take it out to satisfy your required distribution... even if that is a bit confusing.
Charitable Gifting from IRAs: SECURE didn’t alter the age after which taxpayers can make charitable donations from their IRA (it’s still 70 ½). Qualified Charitable Distributions (QCDs) made after reaching your required minimum distribution (RMD) age will also still count toward satisfying your RMD.
Since the 2018 tax law established much larger standard deductions, we’ve seen a spike in charitable giving opportunities from IRAs. If we haven’t spoken about charitable giving from your IRA over age 70 ½ … Let’s.
Notice that allowing QCDs at 70 ½ no longer syncs up with the age when retirement account holders must begin making distributions. Those between 70 ½ and 72, can still be charitable from their IRA up to the $100,000 limit, sort of. Not to make anything too simple, the charitable limit is reduced for those who opt to make a deductible IRA contribution... we think (please double check with your CPA).
Leaving IRAs to Beneficiaries: Before the SECURE Act was passed, non-spousal IRA beneficiaries could stretch the distribution of their inherited IRA over a lifetime if they started making distributions the year after the original account holder died. The very youngest beneficiaries could stretch those distributions out over 82 years. Whereas older beneficiaries were required to withdraw inherited IRA balances much more quickly. For example, an 80 year old beneficiary was required to withdraw an inherited IRA over about 10 years.
With a few exceptions, the passing of the SECURE Act imposes a 10 year withdrawal requirement on most non-spousal inherited IRAs. The 10 year distribution rule does not apply to an account inherited by your spouse, a minor, someone who is disabled or chronically ill, or any beneficiary who is less than 10 years younger than the decedent. Nor does it apply to anyone who already inherited a retirement plan (whew).
The new 10 year distribution requirement is particularly troublesome for those with larger IRA balances and fewer beneficiaries, and especially so if those beneficiaries are in their peak earning years.
IRA account holders who wish to minimize their intergenerational tax obligation must now evaluate their own tax bracket against their beneficiaries’ tax bracket, particularly if their beneficiary will be pushed into a higher bracket by the IRA. If the taxpaying IRA holder’s bracket is expected to be lower, it may make sense to partially convert IRA balances to a Roth IRA which can later be withdrawn tax free by either the taxpayer or beneficiary. The choice for your family may be to pay less now or pay more after your death.
Since, going forward, the ten year rule replaces a required annual distribution for inherited IRAs, those who’ve named trusts as IRA beneficiaries will need to review their trust language, particularly if it limited distributions to the required distribution pace of the old law. To avoid forcing most of their beneficiaries’ inheritance into a single tax year, and therefore the highest tax exposure, they may wish to liberalize their trust language.
There is more to the SECURE Act, but we wanted to give you our first impressions of the most relevant issues. As we confirm our understanding, we will be reaching out to anyone with a planning opportunity. If you’d like to discuss things before then, we welcome your calls.