By Susan M. Graham, Certified Elder Law Attorney, Senior Edge Legal
Major tax changes to retirement accounts happened on January 1, 2020. Can you ignore it?
Congress passed and the President signed a new tax bill called the SECURE Act which went into effect on January 1, 2020. This Act greatly affects estate plans that include Individual Retirement Accounts (IRAs).
First the good news:
- The starting date for required minimum distributions from IRAs is now 72 and not 70½ years for the owner of an IRA.This allows money to grow tax-free for an added 1.5 years.
- There is no age restriction on contributing to IRAs.The SECURE Act repealed the rule that prohibited contributions to a traditional IRA by taxpayers age 70½ and older. Now you can continue to put away money in a traditional IRA if you work into your 70s and beyond.
Now for the bad news:
The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally must now be distributed to most non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule also applies to inherited funds in a 401(k) account or other defined contribution plan.) This acceleration of the payout of the IRA means the income tax on the withdrawals will have to be paid sooner, so the net funds received will be less.
What should you do? There is no simple answer.
Some current plans provide that an inherited IRA be “stretched out” over the lifetime of a beneficiary to reduce the tax paid resulting in a greater inheritance. Under the new law, this is not possible. The income tax must be paid within 10 years.
You need to review your documents as soon as possible with your attorney to determine what is going to happen to your retirement accounts after your death. You may have an existing plan designed to protect the inherited IRA from the beneficiary’s creditors, lawsuits, bankruptcy and possible divorce. The plan you have may conflict with the new law. Do you want your beneficiary to receive the funds in equal annual installments for 10 years, or is it better to wait and have just one payment at the end of the 10th year? Is it more important to save on taxes or protect the inheritance for the Beneficiary’s future?
There is no cookie cutter answer that fits most people. It is critical to have a beneficiary designation for your retirement accounts that follows your overall estate plan which may not happen with the new law rules.
The votes are in! Thank you for completing a Client Evaluation form and voting for an organization to receive a charitable donation at the end of the year.
For 2019, the winner is the Idaho Humane Society, by a nose / paw. We have sent them a donation. Thank you for voting!
Free public seminar – Wednesday, January 15 at 10:00 a.m. and 2:00 p.m.
Join us for this informative seminar, sponsored by Susan M. Graham, to help you understand ways to create your Estate Plan and at the same time increase your retirement security – bring a friend or two!
For more information and to register, Click Here or call 208-344-0375
I don’t suppose you have thought of anyone who could use our services? If so, please have them call us at 208-344-0375. Introductions and referrals are the lifeblood of our practice. Thank you!