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An Important Reminder for Retirees

Under normal circumstances, retirees over the age of 72 are required to withdraw a minimum amount from their IRA, 401(k), or 403(b) account every year.  These withdrawals are called required minimum distributions, or RMDs. 

But we aren’t living under normal circumstances right now, are we?  Thanks to the coronavirus, this is a very abnormal year. 

Which is why, for this year only, retirees don’t have to take RMDs!

You see, back in March, Congress passed the CARES Act, a major stimulus bill designed to help buoy the economy.  One of its many provisions was to suspend all RMDs for 2020.  That means you can leave that money in your retirement account for the year if you don’t need it now.  (If you’ve already taken your RMD for the year, you can potentiallyreturn the funds to your account if you want.  More on this in a moment.) 

Deciding whether to take your RMD in 2020

So, is delaying your RMD the right thing to do?  The answer depends on whether you need to take funds from your retirement account to maintain your standard of living.  If you don’t – or if you can draw those funds from somewhere else, like a taxable account – then skipping your RMD is probably the right decision.  That enables you to leave the money where it is so it can continue to grow.  It will also help reduce your income taxes for 2020, as RMDs are taxed as ordinary income. 

If you do need those funds, however, there’s nothing wrong with taking an RMD as usual. After all, that’s what your retirement savings are for! 

A couple things to keep in mind if you want to skip your RMD this year:

  1. Normally, retirees must take their RMD by December 31.  For that reason, many people set up automatic withdrawals so they don’t forget.  (After all, forgetting usually triggers a hefty 50% penalty.)  So, if you want to skip your RMD for the year, be sure to cancel your automatic withdrawal if you have one. 
  2. If you’re philanthropically inclined, you can still take money out of your IRA and donate it to charity.  In fact, many retirees often donate their RMD in the form of a qualified charitable distribution, which is tax-deductible.  You can still do this in 2020 even if you’re not technically taking an RMD. 
  3. If you are the owner of an inherited IRA, you’re also exempt from taking distributions
    in 2020. 
  4. Finally, if you already took your RMD for the year because you didn’t realize you were exempt, you can return it to your account even if it has been more than 60 days since your withdrawal.  The deadline for this provision is August 31, so please let us know if you need help. 1       

All in all, delaying your required minimum distribution is a good option if you don’t need the money and/or want to reduce your income taxes.  But if you have any questions or concerns about your retirement accounts, please let me know.  Our door is always open! 

1 “IRS announces rollover reflief,” Internal Revene Service, June 23, 2020.  https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act

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CARES Act Infographic

To help combat the coronavirus pandemic and shore up the economy, Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It’s a massive, $2 trillion stimulus package – the largest in American history.1 

This historic legislation contains benefits for almost every American, and some of the provisions are especially important for retirees.  We have created a special infographic that summarizes some of the act’s most high points.  Please study it carefully, and then let us know if you have any questions. 

1 Sarah D. Wire, “Senate passes $2-trillion economic stimulus package,” Los Angeles Times, March 25, 2020.  https://www.latimes.com/politics/story/2020-03-25/vote-senate-on-2-trillion-economic-stimulus-package-coronavirus

Breaking Down the Secure Act

Important Provisions of the SECURE Act

Before we dive in, understand, that the SECURE Act is over 20,000 words long.  (And in fact, the Senate had to tuck it away in a much, much larger appropriations bill to pass it.)  That means there isn’t room to cover every provision of the new law, and many won’t apply to you anyway.  So, what follows is a brief overview of the major changes that could affect your finances.

Are you ready?  Then take a deep breath as we go over…     

Changes to the IRA “stretch” provisions2

For years, one of the most popular estate planning strategies was the use of Stretch IRAs.  When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs.  Under the old rules, these beneficiaries could take distributions from their inherited IRA based on their official life expectancy.  This allowed them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period.  For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.  

Now, non-spousal beneficiaries who inherit an IRA in 2020 or beyond can no longer do this.  Instead, inherited IRAs fall under the new “10-Year Rule”.  This means that all the money in the IRA must be withdrawn by the end of the 10th year following the year of inheritance.  At that point, the beneficiary must pay taxes on that money.

Note that the rule does not require the beneficiary to take withdrawals during the 10-year period if he or she doesn’t want to.  That’s important!  Deciding when to take withdrawals should be based on several factors, including the beneficiary’s current financial situation, how close they are to retirement, and when they plan on taking Social Security benefits.  

Something else to note: The new 10-Year Rule does not apply to spouses, disabled and chronically ill beneficiaries, and minors.  For the last group, the exception lasts until the child reaches the “age of majority”, which is 18 to 21 depending on the state.  Once they reach that age, the 10-Year Rule kicks in.  

Make no mistake: This new rule will have a profound impact on beneficiaries, especially those who are younger and could otherwise have waited decades before making withdrawals (and paying taxes on those withdrawals).  For this reason, if you are either planning to bequeath an IRA to your beneficiaries, or are expecting to inherit one yourself, we should have a conversation about your options.  We want to do everything we can to help you and your heirs maximize your retirement savings while minimizing your tax burden.   

Changes to Required Minimum Distributions for IRAs2

Speaking of maximizing your retirement savings…

Another change the bill makes is to lengthen the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½.  Once they hit this milestone, they are required to begin making withdrawals. (These are called required minimum distributions, or RMDs.) Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs. 

Note: This change only applies to those who turn 70½ in 2020 or later.  Even people who turned 70½ in December of 2019 would still have to take an RMD for 2020.

That’s it for this provision.  See?  We told you some of the changes were simple.  

Other IRA Changes2

Here’s another simple change.  Under the old rules, contributions to a traditional IRA were prohibited once a person reached the year they turned 70½.  No longer.  Now, anyone, even those older than 70½, can keep contributing to their IRA so long as they continue to work.  

Here’s an example.  Jane turns 70½ in 2020 but decides she wants to continue working.  So rather than withdraw money from her IRA, she decides to make a tax-deductible contribution to it instead.  While Jane must still take RMDs once she turns 72, she decides to keep making contributions every year until she actually retires, as the math still works in her favor.  

Obviously, this change only benefits those who continue working into their seventies.  And even then, it may not always make sense to keep contributing to your IRA.  But it’s always nice to have options!    

Another change is for new parents.  Under current law, a person must be 59½ years old to make withdrawals from a traditional IRA. If they withdraw money earlier than that, they must pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if they need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money inside a retirement account to be saved for retirement. 

Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses.  This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.

Changes to 401(k)s2

The SECURE Act brings many changes to 401(k)s, but most are for businesses to worry about.  There is one change you should know about, though, and it involves annuities.  

A type of insurance product, many annuities offer a monthly stream of income, sometimes for life.  This can make them attractive for retirees.  Historically, few 401(k)s contained annuities.  The SECURE Act makes it easier for employers to offer this as an option.    

The reason we mention this is because you should talk to us before putting your money in an annuity.  Choosing the right annuity can be difficult, as there are many types and features, and some annuities come with high costs.  So, while an annuity may be right for some people, that doesn’t necessarily mean it’s right for you.  

If you have questions about this, let’s chat!

Changes 529 Plans2

For many Americans, paying off student loans is a difficult financial burden.

To help pay for their loved ones’ higher education, some parents and grandparents use 529 plans.  Any funds invested in a 529 plan can be used to help pay for college expenses, like room and board or tuition.  The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.  

Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans.  This $10,000 limit is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of a 529 plan beneficiary’s siblings.

If you have invested in a 529 plan for a child or grandchild with lots of student debt to pay off, let’s talk to see if it makes sense to take advantage of this.    

Conclusion

As you can see, the SECURE Act is loaded with changes and provisions for those saving for retirement.  So, again, if you have any questions or concerns, please don’t hesitate to contact us!  

In the meantime, remember that we’re here to help you work toward your financial goals.  Please let us know if there’s ever anything we can do – in 2020 and beyond.

Happy New Year!  

Sources

1 Anne Tergesen, “Congress Passes Sweeping Overhaul of Retirement System,” The Wall Street Journal, December 19, 2019.  https://www.wsj.com/articles/senate-spending-bill-includes-significant-changes-to-u-s-retirement-system-11576780736

2 Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019.  https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF