2020 tax update: Congress passed the SECURE Act and how it affects retirees
Retirement savers have a win and a loss at the end of 2019
Who says Congress is tied up with impeachment? Both the House and the Senate passed a Christmas-time bill that gives retirement savers both a gift and a piece of coal.
A gift! Required distributions from retirement accounts will start at age 72
The good news is that if you’re not already of the age 70 ½, then you can delay your required minimum distributions from your retirement accounts until you are age 72.
For decades, the law has required anyone who has a retirement account to begin distributions the year in which they turn 70 1/2. Now, the rule has postponed the required minimum distributions (RMDs) until age 72. That is an age that is much more easy to remember. It's also a benefit for younger retirees, because they can defer taxes a little longer if they don't want to take distributions now.
The bad news is that if you’ve already started your IRA required distributions, then you’ve got to keep pulling them out. Only folks who turn 70 1/2 in 2020 and younger folks benefit from this Senate’s Santa gift.
Congress did not make it clear whether or not the percentage of your account that you must withdraw will be changing. This could make it confusing for retirees and financial planners like us! We'll keep you posted as soon as we know anything. But, to reiterate, if you are already taking your RMD then this gift is not for you. You must continue taking the distributions, just like you have been.
If you are younger, then you benefit. Turning 70 1/2 in 2020? You don't have to start RMDs until 2021 or 2022, depending upon whether your birthday falls in the first or second half of the year. Younger folks get a little more choice and control of when to make distributions from retirement accounts.
Interestingly enough, 80% of Americans are taking more than the minimum distribution from their retirement accounts. It's only a gift to the 20% who don't want to take IRA distributions and continue to defer that tax bill as long as possible. (Levine)
A lump of coal: No more Stretch IRA
The Senate left a lump of coal for our kids and younger generations who are inheritors.
A surviving spouse may roll the decedent’s IRA into his or her own account. A child who inherits an IRA may continue to defer taxes until they reach the age of majority (determined by their state of residence), and then defer for 10 years after that. Other than these (and a handful of other rare) exceptions, anyone who inherits a retirement account after December 31, 2019 will have to pull out the money and pay income taxes within 10 years.
Until now, we’ve all benefited from the “stretch IRA,” which allows the inheritor to spread the income over their life expectancies. And then a second generation could inherit the retirement account and spread it over their life expectancies. But no! The stretch is gone! This is a big tax increase, and it’s not getting a lot of attention.
To recap, any IRA, Roth IRA, 401k, 403b, 457, TSP, profit sharing plan, or another retirement account qualified with the IRS for tax-deferral faces a sure-death 10 years after we pass away. Our inheritors may no longer spread the payments from the IRA over their life expectancies. They may pull the money out sooner, but no later than, the tenth year after the decedent’s death.
Go Tax Free!
The loss of a stretch IRA is a big loss for those of us who plan on transferring at least some, if not all, of our financial assets to our children after we pass away. The change is so substantial that I've decided to update my book, Go Tax Free, and the blog, www.gotaxfreebook.com, with new financial planning ideas.
If you're interested in receiving the latest Go Tax Free ideas as our team comes up with them, visit the website and click the link to subscribe. In the mean time, if you haven't already downloaded the free Kindle version of my book, Go Tax Free, visit Amazon or call your wealth manager and we'll make sure to get you an e-book. The concepts therein are timeless, but the loss of the stretch IRA presents timely new planning opportunities, and I am excited to share them with you.
Here's to a great 2020!