Our Mission: To identify and implement steps towards your definition of “FINANCIAL INDEPENDENCE” while protecting and growing your wealth.
The Secure Act, passed by congress December 20, 2019, has a significant impact on 2020 newly retirees, future retirees and new beneficiaries of inherited retirement accounts. Let’s start with Inherited IRAs, Inherited 401Ks and Inherited Roths. These new beneficiary accounts have lost their “stretch” benefit formerly available to beneficiaries. Before 2020 non spouse, individual beneficiaries were allowed to “stretch” their withdrawals over their own lifetimes, spreading both taxable income from Inherited IRAs and tax free income from Inherited Roth IRAs. Current owners of these beneficiary retirement accounts can continue this stretch advantage. But those inheriting from Jan 1, 2020 forward must deplete all balances in these accounts within 10 years, with a few exceptions:
Spouses inheriting: the Secure Act rule does not apply
Minors who inherit any of these accounts do not fall under this rule, but only until they become adults, then they must complete the withdrawals within 10 years.
Those with less than 10 years age difference from the deceased (such as a younger sibling) do not fall under this rule.
Those deemed disabled do not fall under this rule.
The disadvantage to this new rule particularly hits a taxpayer in his/her 40’s, 50’s or 60’s who inherit an IRA or 401K from a parent. He/she has 10 years to fully deplete the inherited balance during years with often higher earnings and tax brackets.
On the flip side, for soon to be or retired individuals not yet 70.5 when required distributions from Individual IRAs used to be mandatory, the new required mandatory distribution age is now 72. I’ve not yet seen an adjusted withdrawal table (possibly to be released in 2021) for expected longer lifespans. The last time these tables were adjusted was mid 2002. But this allows more flexibility in IRA distributions.
Planning: Even though newly Inherited Roth IRAs must be withdrawn within 10 years, they grow tax free until withdrawn. So the benefit of having a ROTH to bequeath is still considerable. Clients in high tax brackets who inherit ROTHs can then invest wisely and tax efficiently. Timing matters: the IRS doesn’t care WHEN or how much you withdraw each year from an inherited IRA, 401K or ROTH account, as long as these accounts are depleted within 10 years. Just as we work with clients to consider converting IRAs to ROTHs in lower tax years (such as the first few years in an earlier retirement before normal IRA distributions are taken, or before taking Social Security, or when taxable income is offset by taxable losses) we will evaluate tax advantages for these beneficiary withdrawals.
For some clients, to extend the benefit of an Inherited IRA, we will discuss family gifting, or funding a 529 college savings plan, or charitable gifting. Estate planning will need to be revisited for clients inheriting sizable Inherited IRAs or even Inherited Roth IRAs.
The option to make a qualified charitable donation (QCD) directly from an Individual IRA or a Inherited IRA is available provided you are at least age 70.5 at the time of the gift and the gift is made directly to a qualified charity. The limit per year is $100,000. These qualify as part or all of the required mandatory distribution. They can be made to one or more qualified charities. We also analyze gifting of appreciated stock for individual tax benefits, especially in light of the increased standard deduction that went into effect in 2018 tax year.
So in brief, this is a summary of part of the Secure Act. The result: Taxes will be collected earlier due to these changes. It is estimated that the IRS will collect up to 16.4 billion in tax revenue over the next 10 years due to implementing the Secure Act.
As to how this inflow of tax revenue is spent by our government, we can only guess. Regardless, it is gratifying to focus on our stated Mission Statement and strategically plan to protect and grow our clients’ wealth.