There was a lot of fuss around the most recent COVID-19 stimulus bill, which President Trump signed into law shortly after Christmas. While most of what is in the bill is clear at this point–it has been about three weeks since it was signed–one area that seemed to produce at least a little confusion was whether the bill extends tax breaks from Coronavirus-related distributions (CRDs) from retirement accounts. I have written about CRDs in past blogposts over the past year. As you may recall, CRDs allowed you to take a aggregate distribution of up to $100,000 from your retirement accounts in you were directly impacted by COVID-19 (i.e. you were diagnosed and had to quarantine or you were laid off due to Coronavirus restrictions) and that the distribution was not subject to the 10% early withdrawal penalty and you have three years to pay back the distribution. CRDs were designed to help those in financial distress as a result of the Coronavirus pandemic and was most likely a lifeline for many struggling Americans in 2020. Back to the latest Stimulus package. It was reported by at least one news source that the new stimulus package extended CRDs into 2021. I want to be clear here that such information is incorrect and that the new legislation did not carry CRDs into 2021. This is important because if you planned on taking a CRD in 2021, you can’t and also as a reminder to do some research and read up on any Coronavirus-related relief legislation to see how it might impact you. Now, I don’t know what the future holds and depending on how this pandemic continues to play out, the next administration might put CRDs back on the table, but I have heard no definite inklings about that, I’m just saying anything is a possibility at this point. If you took a CRD in 2020 and want to figure out how to pay it back or find yourself in further Coronavirus-related financial hardships in 2021, you will want to speak with a certified financial planner or wealth manager to figure out what the best moves might be best for you.
There are probably very, very, (very) few people out there excited for the announcement of new life expectancy tables used to determine required minimum distribution (RMD). I mean, let’s be honest, nobody is every really gets excited for IRS announcements. While I can’t say this announcement made my day, I did think it was some really good information worth sharing with you as it could have a substantial impact on your retirement savings and financial plans. Furthermore, the IRS does not normally revise their RMD tables, so this was notable (In fact, it’s been almost 20 years since the last revision). As you probably well know, RMDs are waived for 2020 and 2021 RMDs will follow the existing RMD tables. Again, these RMD changes won’t go into effect until 2022 so, of course, I encourage you to start thinking about it now when it comes to what you want to do with your RMDs and whether your current retirement plans might be impact by an RMD change. If you aren’t familiar with life expectancy tables, there are three that the IRS uses when determining RMDs for those old enough to take them and their beneficiaries: The Uniform Lifetime Table (used to calculate YOUR lifetime RMDs), the Joint and Last Survivor Table (used for when your spouse is your sole beneficiary and is more than 10 years younger than you), and the Single Life Table (when used by an “eligible designated beneficiary” such as a minor child or a surviving spouse). The new changes will most likely lower RMDs for most Americans, which also means lower taxes on your RMDs. Lower taxes means you can spend more of your nest egg on retirement and you. Maybe some IRS announcements aren’t so bad after all.
Life can be unpredictable. What might seems like a good idea today can become a bad idea tomorrow. Thus, it can be hard to truly plan for the future when you don’t know what it holds. It’s also what makes life so unpredictable. Luckily (or should that be surprisingly), the IRS realizes this and has allowed some flexibility with what you can do with your IRA(s). For example, they know that there may be times when you need more money than your annual required minimum distribution (RMD). Therefore, they allow for you to take about more than your RMD amount. Another example is that they allow you to take a withdrawal–obviously, so long as you meet requirements–even if you already took your RMD. Even if you rolled that RMD back into your IRA, you can still take a distribution. Keep in mind with rollovers, there is still a once-per-year rule, but that is suspended for 2020 RMDs until August 31, 2020 (you have until that date to roll your 2020 RMD back into your IRA). While the IRS often gets painted as cruel, they do realize–occasionally–that life can be have some unexpected turns and that you should be able to have to flexibility financially to meet those twists and turns. If you want to roll your 2020 RMD back into your IRA or just want to figure out whether you can take our more than your RMD, I strongly encourage you to talk with a certified financial planner or wealth managers. They can help to make sure you take the right steps.
If you’ve been staying on top of retirement news over the past 12 months, then you’ve probably read about the passage of the SECURE Act and it’s termination of the stretch IRA as an estate planning tool. Just a quick refresher, but a stretch IRA was an IRA inherited by a beneficiary in which the beneficiary then took required minimum distributions (RMDs) according to his/her life expectancy and not that of the original IRA owner. If the IRA was inherited by a young beneficiary, that meant the funds could grow, possibly over decades, before the inheriting beneficiary reaches 72 and has to start taking RMDs. The SECURE Act got rid of that and replaced the Stretch IRA with a 10 year rule, which means that the money in the inherited IRA must be emptied by the 10th year after inheriting. Of course, if there is money left over, it will be penalized by the IRS (what else is new, right?). This might seem like a hassle, but it can actually allow a lot of freedom, particularly in regards to when you take the money. Over that 10 year period, you are not required to take money every year. Now, you could do that if you wanted, but you could also take distributions 8 out of the 10 years or 5 out of 10 years. This can open up a lot of opportunities to adjust your financial and retirement plans and use the money at your discretion. All that matters is the account is empty by year 10. Of course, if it’s a Roth IRA, the money is already taxed, which is an added bonus. If you have questions about the 10 year rule or it appears that you may inherit one on the future and want to start planning what to do with the money, you should speak with a certified financial planner or wealth manager.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27. It’s a massive relief package designed to help Americans get through these difficult economic and financial times. Yes, this is the legislation that also includes the one-time payments from the government for those below a certain annual salary. While most of the reporting on the CARES Act tends to focus on helping those of working age who find themselves without a job, it does have some advantages for retirees. First off, many retirees will be eligible to receive the highlight of the legislation–those one-time government checks that everyone keeps talking about. The CARES Act does allow for those collecting Social Security and other benefits–such as Supplemental Security Income–are eligible to receive a check. Now, obviously, this won’t apply to everyone and some seniors will not qualify due to their individual situations. You will need to submit a tax return for the government to determine if you are eligible, even if you know you won’t owe any taxes. Another interesting aspect of the act is that it is waiving required minimum distributions (RMDs) for 2020. That goes for both employer plans and IRAs. That means you do not have to take an RMD for 2020, if you are eligible to do so. This unprecedented waiver means that money stays in your retirement account. The CARES Act also waives the 10% early distribution hit you may take if you take an early distribution of up to $100,000 from an IRA or other retirement plans to cover costs related to Coronavirus. I don’t know the specifics of this yet and you will want to do some research of what qualifies before trying to take advantage of this. Of course, I also discourage you from taking money out of your retirement savings any sooner than you have to. However, I understand that situations, such as a costly illness, may change those plans. You may want to talk with a certified financial planner or wealth manager to learn more about your options and whether you can hypothetically do an early distribution. There’s a lot in the CARES Act legislation and I encourage you to read more about it and learn as much as you can, regardless of whether you are retired, near retirement, or decades away as it has the potential to impact a wide array of Americans.
Now that the SECURE Act has been signed into law, you will want to know how it might affect aspects of your retirement, retirement planning, and your estate. While I’ve talked here about how the SECURE Act will expand retirement benefits for many workers, I haven’t talked much about how the legislation can impact your beneficiaries and their beneficiaries, also known as a successor beneficiary. A successor beneficiary might end up being someone such as the offspring of a beneficiary or one that the original beneficiary listed on proper documentation associated with the inherited account. The old rules–pre-SECURE Act–allowed a successor beneficiary to take over for the original beneficiary; stepping “into the shoes” of the deceased beneficiary. In other words, the beneficiary could continue to take required minimum distributions (RMDs) from the inherited IRA during the original beneficiary’s remaining life expectancy. This was known as the “stretch” IRA. The SECURE Act got rid of that. Now, successor beneficiaries who inherit in 2020 or later are subject to a 10-year payout rule. That means that the successor beneficiaries cannot use the original beneficiary’s life expectancy as the measure of the length of time that RMDs can be taken. Instead, the RMDs can only be taken for 10 years following inheritance of the IRA. If you have questions about successor beneficiaries and the SECURE Act, you should speak with a certified financial planner or wealth manager.
As many of you may be aware, the SECURE Act that was recently signed into law made some big changes to retirement for many Americans. Along with opening up opportunities for small businesses to band to together to offer retirement benefits, it raised the age for required minimum distributions (RMDs) to 72. However, that new age for taking RMDs doesn’t go into effect immediately or retroactively. If you turned 70 1/2 in 2019 and thought you could wait a year an a half to take your first RMD, well, that’s not the case. The option to wait until you are 72 to start taking RMDs is only in effect for those who turn 70 1/2 after December 31, 2019. That means if you 70 1/2 in 2019, you have until April 1, 2020 to take your RMD. If you turned 70 1/2 after the first of the year, then you can wait until April 1 of the year after the year you turned 72. For example, if you turned 70 1/2 on February 1, 2020, then you can delay taking your RMD until the year after you turn 72 (that deadline would be April 1, 2022, in this instance). This can be a bit confusing, especially if you turned 70 1/2 during the latter half of 2019. Therefore, if you have questions about whether you should take an RMD, you should talk with a certified financial planner or with your retirement plan custodian. They should be able to answer any questions you may have.
If you have more than one IRA, you can aggregate the required minimum distributions (RMDs) and take them from one IRA. Most IRA owners are familiar with this allowance. However, not everyone is aware of that fact that you cannot include inherited IRAs as part of that aggregation. It can be easy to overlook. It should be noted though, that if you inherited multiple IRAs of the same type (Roth vs. traditional) from the same person, you can aggregate the RMDs from those. In short, if you have multiple IRAs, one of which is an inherited IRA, you will need to take at least two RMDs. One for the inherited IRA and an aggregation of the others–should you choose to aggregate. As with everything else regarding RMDs, you want to make sure that you are following this rule as failure to properly take an RMD could open you up to IRS penalties and could be costly. If you have questions about whether you can aggregate your RMDs or need help with doing so, you should speak with a certified financial planner or wealth manager.
It can be easy to forget about required minimum distributions (RMDs), especially as you move into retirement or if you inherit an IRA. Now, forgetting to take an RMD isn’t the absolute end of the world, but it should not be taken lightly. The penalty to missing an RMD is half the amount that was to be distributed, which is quite harsh and can be a substantial amount of money depending on the size of your retirement savings. So, what should you do if you forgot to take an RMD or you learned that you needed to take one from an inherited RMD? First off, withdraw the RMD out of the account as soon as you realize you need to take it. Next you will need to report the mistake to the IRS on the Form 5329, which can be filed along with your annual tax returns. On the form, make sure to report the RMD that should have been distributed, the amount distributed before the deadline, any reasonable cause amounts you would like waived, the penalty amount, and a letter explaining the reason for missing the RMD. Finally, and this is very important, do not pay the penalty until you hear back from the IRS with a denial or approval of your reason for the mistake. If your reason is denied, the IRS will then ask for payment of the penalty. As with anything involving the IRS, unless you are absolutely certain you know what you are doing, you should consider either hiring a financial advisor or tax professional to fill out and file your From 5329 so as to make sure it is done correctly. If you don’t want to have them actually file for you, you may want to at least consider talking to them during the process so as to make sure you’re doing things right. Remember, the key thing is that you correct your mistake as soon as you realize it and that you be honest with the IRS. Chances are your excuse won’t be accepted, but you will only have to pay the RMD penalty and nothing more. Missing and RMD is no laughing matter, but it’s not something you need to have a meltdown over, either. Just stay calm and do what you need to do!
I’ve written about the SECURE Act here many times in recent months as it is legislation that could open up a lot of retirement saving opportunities for a wide swath of Americans. Officially titled as “The Setting Every Community Up for Retirement Enhancement Act of 2019,” this bill could allow for small businesses to band together to offer retirement savings plan benefits, increase the age for required minimum distributions (RMDs), and allow IRA and 401(k) plan holders to purchase annuities with money in the accounts. While all those a good things, this post is really going to focus on the age for taking RMDs and how pushing it back could be a good thing–or something that doesn’t matter at all. For those who want to continue working into your 70s, the thought of delaying RMDs can be quite enticing. I mean, if you’re earning income, then why would you want to touch your retirement savings? However, according to some experts, that really may not matter as most Americans probably won’t work past 70 1/2. The SECURE Act is looking to push the required age for taking RMDs back by about 18 months to age 72. On average, that would save retirees about $33,500, but that really isn’t much, especially if your retirement lasts decades. This leads to my next question, will you need your RMDs at 70 1/2? If not, what do you plan on doing with the money? Will you invest it? Give to charity? These are things you should be thinking about as you move towards retirement, especially if you plan on retiring past the required RMD age. If you need ideas as to what to do with your RMDs, you should speak with a certified financial planner.
THE SETTING EVERY COMMUNITY UP FOR RETIREMENT
ENHANCEMENT ACT OF 2019