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.
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.
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.
If you’ve been reading up on the SECURE Act, then you are probably well aware of the fact that it eliminated the age restriction on contributions to traditional IRAs. This is a big deal for those Americans planning to work into their 70s by allowing them to put money into their traditional IRAs while they continue working. It should be noted, though, that removal of the age restriction does not remove required minimum distribution (RMD) age requirements. That means that people will still need to begin taking RMDs from a traditional IRA at 72, even as they are still making contributions. The ability to continue making contributions can blunt the blow of having to take RMDs out of your nest egg before you really want to. It may feel a bit weird having money coming in and out at the same time when it comes to your retirement accounts, but it can also be a good feeling. It can be nice knowing that you can continue to work and still build up your nest egg. Furthermore, future generations may continue to push these age restrictions, especially as medicine and planning allow people to live longer and thus work longer (it’s debatable whether that’s for good or bad reasons). If you plan to work well into your 70s and take advantage of the ability to continue contributing to a traditional IRA, you should speak with a certified financial planner or wealth manager to make sure it’s the right decision for you.
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.
I’ve written about the SECURE (Setting Every Community Up for Retirement Enhancement) Act a number of times over the past year or so. I’m writing now following it’s passing Congress last week as part of the year-end spending bill. Now that President Trump has signed it into law, it goes into effect on January 1, 2020. The legislation is a relatively large overhaul to retirement savings accounts. The two biggest changes are to contributions and required minimum distributions (RMDs). First off, the new law eliminates the age limit for traditional IRA contributions. This means that if you are still working, you can continue to contribute to a traditional IRA no matter how old you are. This can be really helpful for people who plan on working well past 70. As for RMDs, the legislation raises the age for beginning RMDs from 70 1/2 to 72. Again, this is beneficial for people who plan to work past 70 as it prevents them from having to tap into retirement accounts too early. Another big change is the ending of the Stretch IRA, which will be replaced with a ten year rule. The rule will be in place for most beneficiaries and requires accounts to be emptied by the end of the tenth year after the year of death. The change only goes into effect for deaths that occur on or after January 1, 2020. As with any legislation, the SECURE Act includes more than just the above mentioned and I suggest you read up on what the legislation offers and how it could impact your retirement plans and accounts.
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.