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New legislation changes retirement account requirements

January 9, 2020

In 2019, the U.S. House of Representatives voted 417-3 to pass the SECURE Act, formally known as the Setting Every Community Up for Retirement Enhancement Act.

A similar measure had been stalled in the Senate, but at the last minute, it was attached to the spending appropriations bill passed to avoid a government shutdown. Exact details of this will come bill later, but this will be the most significant piece of law to affect the retirement landscape in the last 20 years. It took effect Jan. 1.

For our clients and those who are retired, there is some good news. If you turn 70.5 in 2020 or later, your required minimum distribution age will be pushed back to 72, which is much clearer and pushes back required withdrawals from retirement accounts. A major planning opportunity will be given more time to be taken advantage of, Roth IRA conversions. This will only affect you if you are not currently subject to RMDs.

One of the new planning items we will also have available is the lifting of a maximum age for traditional IRA contributions. Previously, you could not contribute to a traditional IRA if you were over 70.5. This lifts the age cap on that as many individuals continue to work part-time jobs into their 70s.

Another planning item available is that qualified charitable distributions appear to still be eligible at age 70.5. So, even though you may not be subject to RMDs, you may realize a greater tax benefit via direct charitable giving from your IRA rather than itemizing those deductions.

The other major change is regarding the beneficiaries of traditional IRAs and other pre-tax retirement plans. The SECURE act will eliminate the “stretch option” for beneficiaries other than your spouse, such as your children.

The “stretch option” allowed children or other non-spouse beneficiaries to take required distributions over their lifetimes and minimize the taxes paid. Now, once inherited, the distribution requirement for a non-spouse or non-exempt beneficiary will have to be distributed at the end of 10 years. This is extremely significant as the tax impact may be severe for some. Current stretch beneficiaries will not be affected, but this applies to every new beneficiary as of Jan. 1.

Some exceptions to this new rule are: surviving spouses, disabled beneficiaries, chronically ill beneficiaries, beneficiaries that are not more than 10 years younger than the owner, and minor children. This will also apply to all traditional IRAs, 401(k)s, 403(b)s and other pre-tax defined contribution plans. There are a few exceptions to these plans, and you should check with your tax advisor if you are subject.

There are new opportunities for those who are retired or soon to be retired. You should at a minimum be reviewing your estate plan and named beneficiaries with your professional team.

The views are those of Robert Jeter CFP, CRPC, and should not be construed as specific investment or financial planning advice. You should consult your tax or legal advisor for advice on your specific situation.

For more information, go to www.retireinfocus.com.

 

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