I’ve written about the SECURE Act a number of times over the past 11 months or so since it was signed into law. As you may well know, that legislation brought about some big changes, including raising the age for required minimum distributions (RMDs) up to age 72, allowed traditional IRA contributions past age 70 1/2, and eliminating the stretch IRA. Now, there could be even more changes coming to the retirement planning world in America. Recent bipartisan legislation introduced last week, and referred to as Secure Act 2, could take some of the parts of the original Secure Act even farther. Some of the key points of the legislation are the expansion of automatic enrollment to include 401(k), 403(b), and SIMPLE plans, raising of the RMD age to 75, increasing catch-up limits, and matching employer contributions for employees making student loan payments. That last part is interesting as it would potentially allow employers to make matching contributions under a 401(k), 403(b), or SIMPLE IRA for employees making “qualified student loan payments.” The legislation also includes a number of other somewhat minor changes to retirement plans and planning. While it’s still in the early stages, this legislation could have a major impact regarding how people save and when they start spending their nest egg. Obviously, things still have way to go, but I wanted to make you aware of potential changes that could be coming down the pike. It’s worth at least keeping an eye on.
What happens when the person who inherits an IRA dies after inheriting the IRA, but before they reach any potential 10 year payout limit or decide what to do with the money? That sounds confusing, but it’s not as tough as you think. First off, before answering the question, I do think I need to clarify some terms since we are dealing with multiple levels of beneficiaries. The person who succeeds the person who originally inherited the IRA is known as a “successor beneficiary.” Just wanted to clear that up so you can follow along. We will also be focusing on the rules under the SECURE Act passed last year as it is the rule-of-thumb moving forward. Okay. What happens with that inherited IRA after the inheritor dies will be determined by the status of the successor beneficiary. If the successor beneficiary is the spouse of the inheritor, then there are a few different options. They can roll it over to their own IRA, they can set up a separate inherited IRA, they can also do nothing and continue receiving required minimum distributions (RMDs) based on either the dead spouse’s life expectancy or their own. Now, things aren’t so simple for non-spousal successor beneficiaries (i.e. friends, children, etc.). Non-spousal successor beneficiaries must drain the inherited IRA within 10 years of inheriting it. They can do that however they see fit, just as long as they don’t leave anything in there at the 10 year mark. Now, what happens if the inheritor dies and then the successor beneficiary dies before either hitting the 10 year payout limit or deciding what to do with the money? Well, the person who inherits the inherited inherited IRA (yea, that’s confusing) then would work with the remaining time on the successor beneficiary’s watch. I don’t even want to think about what happens if the person inheriting from the inheritor of successor beneficiary. That’s just too many hoops to jump through. Alright, that’s a lot. My advice would be to have a plan and act on it as soon as you inherit such an IRA. It will save a lot of time and hassle.
It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.
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.
I want to start out by stating that this post is not meant to knock employer retirement plans. Such plans can be a great way to get started in saving for retirement or as another source of retirement savings. However, if you do reach a point where rolling a 401(k) or other employer plan into an IRA is a real opportunity/thought, then you should strongly consider doing so. First off, if you are still working and your 401(k) isn’t a huge amount, you could save yourself some serious tax money down the road if you convert to an IRA, especially a Roth IRA. That can be a huge boost when you do retire and don’t have to pay taxes when you take a withdrawal. One of the biggest advantages to an IRA, though, over an employer plan or other retirement accounts is the freedom you have to choose what to invest in. With an IRA you can invest in just about any stocks and markets you wish and can also invest in other things such as certain types of real estate (this can be complicated and not many IRA custodians can do this) and, in some instances, bitcoins/cryptocurrency. You also have more say in your investment strategies with an IRA over an employer plan. Since an IRA is yours–and not an employer benefit–you are the sole person who can decide things such as what you invest in, how much you invest in certain stocks, and when to buy and sell. This freedom can be very enticing for some people and can allow for better customization of goals and benchmarks when it comes to saving for retirement. If it’s too much you can also still start an IRA and have a financial advisor or wealth manager look after it too. You can also have an IRA and a employer-sponsored retirement plan. Many people do this as there are strategic advantages to having both. If you have questions about setting up an IRA or whether it’s even a good idea for your situation, 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.
IRAs and 401(k) are incredibly popular employer offered retirement plans. Many employers currently offer them and with the recent passage of the SECURE Act legislation, even more small businesses and enterprises will be able to offer such benefits to employees. However, IRAs and 401(k)s do have contribution limits, which can be on the lower side–especially for IRAs. Thus, if you find yourself in a situation where you want to do some serious catching up (aside from making catch-up contributions) with your retirement savings or have a sudden windfall (i.e. an inheritance), you may need to look at opportunities to help grow your nest egg outside of those traditional retirement accounts. Now, this doesn’t mean you can’t still make contributions to IRAs or 401(k)s if you have them, but rather, that you should look to open an account for the money you have left over once you’ve maxed out contributions. A very popular option is to open a taxable investment account. A good example of this would be to open an online brokerage account (i.e. E*Trade, TD Ameritrade, etc.). These types of accounts have no contribution limits and no limits on when you can withdrawal the money. They also offer a wide range of investment options (i.e. stocks, ETFs, Mutual Funds, etc.). However, these accounts are taxable and depending on the size and transactions done yearly, things might be a little confusing come tax time. A word of advice before opening a taxable investment account, do your research beforehand and take the time to assess what your tolerance for risk is, what your long-term goals are, and understand the different type of investment options. Investing can be an efficient way to grow your nest egg over time, but remember, there are risks involved. If you have questions about setting up a taxable investment account or just want to talk further about it, then you should speak with a certified financial planner or investment professional.
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.
We are less than a month away from 2020, which means you need to start thinking about your future retirement account contributions for the upcoming 12 month period. If you have more than one retirement account, this may include deciding when and how much you will contribute to each account. For example, if you have a traditional IRA and plan to max out your contributions, will you be making the contribution in one big lump sum or do you plan to spread that contribution out throughout the year in smaller sums. If you have a retirement account with your employer, do you plan to increase your contribution amount (if you aren’t already maxing out) or do you plan to remain the same? Decisions about how much you will contribute–as well as when you will make the contributions–will be determined by your budget and finances. If, say, you have a goal of paying down a particular debt (i.e. a credit card) or know that you will be making a large purchase over the next 12 months (i.e. a used car for your teenager who just got their license), then you may want to take that into account when deciding when and how much you want to put into your retirement account. Obviously, if you are maxing out your contributions, you can’t increase them, and I’d encourage you to do everything you can to keep up those maximum contributions. However, if you feel that you may need to reign those in a bit, then you can do that too. There’s also the topic of catch-up contributions, if you find yourself of the age when you can do so. If you reach that magic age next year–or did so this past year–you may want to budget that extra catch-up amount into your planning. As always, if you have questions about your contribution amount, you should speak with a certified financial planner or wealth manager.
If you have an IRA, you are probably familiar with the one rollover per year rule it comes to rollovers between the same type of IRA (i.e. traditional to traditional IRA). As stated, the rule only allows one rollover per year between the same type of IRA, regardless of how many IRAs you have. If you have 3 traditional IRAs, you only get one rollover between them all. That’s it. It’s important to know when that 365 day period begins. It does not begin when the money ends up in the final retirement account, but rather when the distribution from the original account is received. This is important to know if you want to have an idea as to when you can complete another rollover and to prevent being penalized. It should be noted, however, that this limitation does not count in regards to traditional IRA to Roth IRA conversions, trustee to trustee transfers, IRA to employer plan, employer plan to IRA, and employer plan to employer plan transactions. Basically, it only counts for Roth to Roth or Traditional to Traditional IRA transactions. If you are considering a rollover, you should speak with a wealth manager or certified financial planner to make sure you can do on and to ensure that you do it correctly.