In this month’s edition we will discuss a recent change in the law. On December 19, 2019, the SECURE (“Setting Every Community Up for Retirement Enhancement”) Act became law. The legislation contains a lengthy series of provisions impacting retirement plans and their participants.
Two of these changes are especially significant:
REQUIRED MINIMUM DISTRIBUTIONS
When you contribute funds to a retirement or pension plan such as an Individual Retirement Account (IRA) or a 401(k) plan, your contributions usually result in an immediate tax deduction, reducing your tax liability. Your accounts then have the opportunity to grow within the plan for many years on a tax-deferred or tax-free basis. The combination of these two favorable tax provisions accelerates the speed at which you can build your retirement savings.
At a certain point the law requires you to make annual withdrawals from your plans and pay the related income taxes. These withdrawals are known as required minimum distributions (RMD’s).
For many years, RMDs had to begin by April 1 of the year following the year in which you turned age 70 ½.
This has changed.
For persons turning 70 ½ in 2020 or later, RMDs can now be further deferred until the year you become 72, or if taking advantage of the special first-year deferral option, April 1 of the year you turn 73. This change in the law is attributed to the fact that life expectancies as well as people’s working lives have increased. Thus, depending on your date of birth, your retirement funds can remain fully sheltered from taxes for as much as much as two additional years.
“STRETCH” IRAs
A popular estate planning technique to transfer wealth to future generation(s) has been naming one’s descendants as IRA beneficiaries who, upon inheriting the IRA, would in turn withdraw funds over the course of their own lifetime. This would enable a family to “stretch” an IRAs tax advantages over the course of multiple generations.
Congress determined that this was an excessive tax benefit and has changed the rules.
Beginning January 1, 2020, anyone that newly inherits an IRA from someone other than a spouse must withdraw all funds within ten years of the death of the owner. There are some limited exceptions, but the stretch IRA technique will be largely unavailable from this point forward.
We invite you to contact us to learn more about estate planning and the services we offer.