There was sweeping new legislation enacted last month that will affect every one of us who own or stand to inherit retirement accounts of all kinds. Known as the SECURE act, this legislation does the following:
Required Minimum Distributions
Changes the date that Required Minimum Distributions (RMDs) from IRA, SEP, 401k, 403b, and 457 retirement plans are required to begin from age 70 ½ to 72. Those already taking RMDs because they turned 70 ½ last year are not allowed to stop taking them until they turn 72, unfortunately.
Inherited Retirement Accounts
Effective this year, whenever an owner of the above-listed retirement accounts dies, the account’s beneficiaries, with the exception of those listed below, must withdraw the entire account balance (and pay taxes on the withdrawal) by the end of the 10th year following the decedent’s death.
For example, if Joe died this year and left his IRA to his daughter Jill, she would have until the end of 2030 to completely empty the account. She has flexibility to choose how and when she drains it over that ten years, and it could be beneficial to spread it over several years in order to keep her in a lower tax bracket, since draws from IRAs are considered ordinary income. However, if for example Jill is on Medicare, doing that could cause her to pay higher Medicare premiums for all those years, in which case it could wind up being smarter to clean out the account all in one year. This new law creates lots of opportunities for nuanced withdrawal strategies, which you should definitely discuss with us when you find yourself in that situation.
What is gone now, except for people who are listed below, is the opportunity to “stretch” the IRA distributions, allowing the beneficiary to take minimum distributions over the remainder of their life.
- Spousal beneficiaries
- Certain disabled beneficiaries
- Chronically ill beneficiaries
- Individuals who are not more than 10 years younger than the decedent (including for example a sibling or friend)
- Certain minor children of the decedent, but only until they reach age 18.
For the beneficiaries listed above, it’s business as usual and the pre-2020 rules continue to apply. They are allowed to “stretch” their distributions over their lifetimes just like before.
Other Notable Changes
People working (and their spouses) who are over age 70 ½ are allowed to continue making contributions to their traditional IRAs as long as they are working. In other words, the age limit on IRA contributions is repealed, but you or your spouse must still be employed or self-employed. The only caveat here is if you are making post 70 ½ IRA contributions and you also make post-70 ½ charitable donations directly from your IRA (known as Qualified Charitable Distributions or QDCs), you will lose any tax deductions you may have previously taken for post age 70 ½ IRA contributions, to the extent of the QDC you made. See us if you have any questions about this.
There is also a new exception to the 10% early withdrawal penalty for pre-age 59 ½ retirement plan withdrawals for the birth or adoption of a child. The withdrawal limit is $5,000, and it’s important to remember that you still have to pay state and federal income taxes on any such withdrawal.
You can also now take qualified (tax-free) distributions from 529 plans for apprenticeship programs in addition to college expenses, and you are allowed to take up to $10,000 to pay the principal and interest on student loans for the 529 beneficiary. In addition, you are also allowed to take out another $10,000 tax free to pay off student loan debt for each of the beneficiary’s siblings. If each sibling has their own 529 plan account, this could wind up making a substantial amount of money available tax free for families to use to retire student loan debt. See us for details.
As always, we are available to discuss how these changes will impact you and your family, so give us a call!