Significant changes made by this new legislation may impact you and your financial plans, especially for those in their 50s and 60s who are nearing retirement. The new law includes changes to required minimum distributions (RMDs) for both you and your beneficiaries.
Here are a few questions and answers regarding changes in the SECURE Act that may most affect you.
I turned 70 ½ in 2019 and am scheduled to take my first RMD by April 1, 2020. Can I take advantage of the law’s increase in the age for starting RMDs at age 72?
No, only account owners who turn 70 ½ after December 31, 2019 can start taking their RMDs at age 72.
The SECURE Act eliminates the “Stretch IRA.” What are the new rules for people who inherit retirement accounts?
Those who inherit from people who die after December 31, 2019 must take the money out and pay any taxes due within 10 years. Many beneficiaries will now see higher taxes and a shorter distribution period for inherited retirement accounts under this change. The bill generally exempts surviving spouses, children under the age of majority (age 18 in Wisconsin), and some others. These individuals will follow current rules.
This provision is not retroactive, so it will not affect those who inherited an IRA in 2019 or prior years.
Does the SECURE Act eliminate stretch for all beneficiaries?
No. The law carves out exemptions for certain beneficiaries, which are now called eligible designated beneficiaries (EDBs). They include surviving spouses and minor children up to majority – but not grandchildren. Also included are disabled and chronically ill individuals (as defined by the IRS) and individuals not more than 10 years younger than the IRA owner (generally, siblings around the same age).
For example, an IRA owner dies in 2020 and leaves her IRA to her minor child. The minor child can still stretch the same as before, but only until that child reaches the age of majority (which is age 18 for Wisconsin). Once the child reaches majority, he or she is no longer an EDB, so the 10-year rule will apply and the plan assets will have to be paid out by year 10, or age 28.
In another example, an IRA owner dies in 2020 and leaves her IRA to her minor grandchild. The grandchild is not considered a EDB, so the entire balance must be emptied by the end of 10 years.
Once an account owner turns 72, will they also need to fully distribute their account within 10 years?
The 10-year rule only affects beneficiary accounts of those not considered an EDB. Account owners can still stretch their accounts according to their life expectancy.
How do RMDs work under the 10-year rule? Are RMDs required during the 10 years?
No. Under the 10-year rule, there are no RMDs during the 10 years. According to the new law, the entire IRA balance must be emptied by the end of the 10 years. Failing to withdraw funds within the 10-year period would result in a 50% tax penalty on assets remaining in the account.
Beneficiaries can withdraw any amounts they wish over the 10 years, giving them some planning flexibility during that time to withdraw funds when it best fits their tax situation.
I’m 70 ½. Can I make Traditional IRA contributions?
Yes. If you have earned income, you can now make a Traditional IRA contribution starting in 2020 tax year. This also includes spousal contributions.
The new law will give you additional time to do Roth IRA conversions without having to worry about the impact of RMDs. However, once RMDs begin, those RMDs cannot be converted to a Roth IRA. Those over 70 ½ in 2019 won’t be able to save in an IRA for 2019.
Am I allowed to make a charitable donation from my IRA now that the RMD age is 72 if I’m 70½ – 71?
Yes. Currently, people who are 70 ½ or older can give money from a Traditional IRA to one or more charities and exclude the amount donated from their taxable income. Nothing in the law changes that.
What should I do now?
- It’s very important to review your beneficiary designations on your retirement accounts to ensure they align with the new rules and your wishes. If you have a retirement account with Member Benefits, log in to your account at yourMONEY or give us a call at 1-800-279-4030.
- If you have a trust, you should review the trust’s language to see if it still aligns with your intended goals.
- Review your tax situation and how the new rules will impact the true amount of wealth you are passing to your children.
There may be several strategies to consider depending on your circumstances, so it pays to be proactive. Consult your personal advisor or tax attorney for assistance.