Retirement Planning Earthquake
By Steve Carlson
Just when you thought you had a good grasp of retirement planning rules, the government changes them!
A new federal law took effect January 1, 2020, that affects many different parts of retirement planning. The SECURE Act of 2020 (Setting Every Community Up for Retirement Enhancement) has 29 provisions in all (although not all are retirement-related). Let’s look at five of the most notable provisions:
Required Minimum Distributions (RMD)
As of January 1, 2020, the age where an investor is required to begin taking distributions from their retirement accounts [traditional IRA, 401(K), profit-sharing plans, 403(B), SEP, Simple IRA’s, etc.] is now age 72, up from 70 ½. This means that you will be able to let your account grow, tax-deferred, for an additional one or two years before you are required to take money out. Important: Account holders who turned age 70 ½ before January 1, 2020, are grandfathered—they remain under the old rules!
Qualified Charitable Donations (QCD)
Once an investor reaches the age of 70 ½, they become eligible to begin making tax-advantaged Qualified Charitable Donations (QCD) from their IRA. A QCD is a direct transfer of funds from your IRA, payable to a qualified charity [a 501(c)(3) organization]. This is a great way to give to a charity AND reduce your taxable income! The maximum annual amount that can qualify for a QCD is $100,000. If you file your taxes jointly, a spouse can also use a QCD from their own IRA. Here is the good news: although the SECURE Act changed the age for RMDs to 72, age 70 ½ still remains the age at which an investor can use QCD’s from their IRA. But, there is a catch–the QCD caveat.
QCD Caveat
Contributions made to your IRA (not a Roth IRA) after age 70 ½ affects how much of your QCD can be characterized as a Qualified Charitable Donation. The SECURE Act says post-70 ½ contributions will offset charitable donations dollar for dollar. For example, if you were to contribute $5,000 to your traditional IRA at age 71, and then make a $10,000 QCD from your IRA, only half ($10,000 minus your $5,000 contribution) can be claimed as a QCD.
IRA Contributions
Before the SECURE Act was passed, an investor could not make contributions to their IRA account after age 70 ½. The SECURE Act has removed that provision. You may now make contributions to your IRA after age 70 1/2, as long as you have earned income (up to your earned income amount or contribution limits, whichever is less).
Stretch Provisions
This is probably the most important change in the SECURE Act. Under the old law, distributions from an inherited retirement account could be ‘stretched’ out over a beneficiary’s expected lifetime. This allowed the beneficiary to spread out the tax burden over many years while letting the account grow. The new law only applies to a beneficiary inheriting a retirement account where the account owner has died after December 31, 2019.
Under the SECURE Act, the stretch provision remains available only to the following: a surviving spouse, a beneficiary less than 10 years younger than the original account owner, or a beneficiary with a disability or chronic illness.
The SECURE Act eliminates the lifetime stretch for all others who inherit retirement funds. Those beneficiaries must now receive the entire proceeds and pay taxes on the distributions within 10 years. (If a minor child inherits an account from a parent, the 10-year clock won’t start until the child reaches the age of majority.) This is a major shift in retirement planning, as an account beneficiary relying on the stretch rules to create lifetime income (and minimizing the tax burden) may now have to come up with an alternative plan!
How can APC help?
Do you have more questions about retirement income planning? Send your questions to our Knoxville Certified financial planners or directly to Steve@assetplanningcorp.com!
