New Rules for IRAs: The SECURE Act Changes Options for IRA Beneficiaries and More
Did you spend your career socking away money in a Traditional IRA or roll your 401k over into a Traditional IRA after you retired? A Traditional IRA is one of the most common ways that our clients save for retirement. On December 19, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) as part of a larger spending bill. It went into effect on January 1, 2020 and impacts most Traditional IRAs.
Required Minimum Distribution Changed from Age 70 to 72
The SECURE Act pushed back the age that IRA owners must begin taking their Required Minimum Distribution (RMD) from 70½ to 72. This is great for investors who don’t need to rely on IRA distributions in retirement as it allows your IRA investments to continue growing tax-deferred for a bit longer. If you turned 70½ prior to December 31, 2019, your RMD will continue on the same schedule.
Check out the IRS’s website, https://www.irs.gov/pub/irs-pdf/p590b.pdf, for more information on IRA distributions.
Keep Contributing to a Traditional IRA After 70½
Prior to the SECURE Act, Traditional IRA owners couldn’t contribute to their IRAs after 70½, even if they were still working. The new law now allows Traditional IRA owners with earned income to contribute to their IRA after 70½! There is still no age limit on contributions to a Roth IRA.
Effect on Qualified Charitable Distributions
If you’ve been making charitable gifts through your Traditional IRA, you’ll want to pay special attention to the effects of the SECURE Act on qualified charitable distributions (QCD).
You may be asking, what are QCDs? The IRS allows IRA owners who are 70½ and older to make a distribution of up to $100,000 per year directly from their IRA to a qualified charity. The QCD offsets the RMD requirement. Because the IRA owner never received the funds, the QCD amount is excluded from taxable income. The Act has not changed the age at which an IRA Owner can start making a QCD – it’s still 70½. Visit the IRS website for additional information on charitable donations: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions.
Many Traditional IRA owners find QCDs a useful tax strategy. However, IRA owners need to be careful when combining contributing to their Traditional IRAs after 70½ with making QCDs. The IRS does not want IRA owners to double-dip in the tax favored pool. In other words, the IRS does not want a taxpayer to benefit from a tax-deductible IRA contribution and make a tax-free QCD. Instead, the IRS will track all post-70½ deductible IRA contributions and use them to erase the tax benefits of a QCD.
We encourage you to contact your CPA or tax preparer if you have questions about QCDs.
Inherited IRAs
Prior to the new law, an estate planning method called the “stretch IRA” allowed IRA beneficiaries to stretch their distributions, along with the tax due on those distributions. This was accomplished using the beneficiary’s date of birth, which allowed the RMD to be “stretched” over the beneficiary’s lifetime instead of the account owner’s lifetime.
The SECURE Act requires most IRAs to be depleted within 10 years of the IRA owner’s death. Beneficiaries don’t have to spread the withdrawals equally over 10 years, but they must empty the account by December 31 of the 10th year after the IRA owner’s death. This change only affects beneficiaries of an IRA of which the IRA owner has passed away after December 31, 2019.
There are some exemptions from this rule. Spouses can choose to inherit the IRA or roll it into their own IRA. Beneficiaries may still use the lifetime payout method if they: 1) have a disability or chronic illness, 2) are minor children, or 3) are not more than 10 years younger than the IRA owner.
Some of our clients have named a trust as the beneficiary of an IRA. Removal of the stretch provision can have an impact on your estate plan. We strongly encourage you to review your plan and beneficiary designations with your estate planning attorney.
Conclusion
At Mission, we ask clients to review their beneficiary designations annually. The SECURE Act is another reminder of how important it is to ensure that your beneficiary designation reflects your wishes. The new Act also brings important changes that create opportunities for planning with your CPA and estate planning attorney. Mission Management & Trust Co. serves as an IRA custodian and investment manager. We stay on top of developments to keep our clients informed about changes that may affect their accounts and planning. If you would like more information on opening an IRA with Mission, please contact us at info@missiontrust.com.
By Leah Geistfeld, CTFA, Trust Officer
