Do you know about the IRAs changes
|Hello friends, |
Everything you knew about your IRA has changed since Congress passed the SECURE Act legislation that went into effect at the beginning of 2020. We’ll cover 3 of the changes in the law.
When we are working, we may have a 401k or some other type of tax-deferred employer sponsored plan. When we retire, or sometimes when we turn 59.5 years old (a), we can transfer our 401k to an IRA.
A Traditional IRA or a 401k has never been taxed. Under the previous rule, if we were not taking money out of our IRAs when we turned 70.5 years old (b), we were required by law to start drawing money out. This is called a Required Minimum Distribution, or RMD for short.
With the new law change RMDs will not be required to be taken until age 72 (c). Often, I speak with clients who don’t want to take their money yet. This can allow your money to continue to grow on a tax-deferred basis for longer.
If you turned 70.5 in 2019 you must begin taking your RMDs. If you turn 70.5 in 2020 you can wait until you’re 72 (c).
The most significant change in my opinion is the “stretch IRA” is no longer an option for all beneficiaries (c). What does that mean?
Previously, if you passed away and had money left in your IRA, the beneficiary of your IRA could stretch payments out over their lifetime.
To illustrate I use a hypothetical example. Let’s say you inherit a $100,000 IRA. You earn $75,000 that year from your employment. Then you take a complete distribution of the inheritance. The $100,000 would be added to your $75,000 salary. The IRS states your income is $175,000 for that year. The obvious problem is you would be taxed at a higher rate than if you had just earned your normal $75,000 income. The previous solution had been to take small distributions over many years.
What you could have done before is you may only take $3,000 per year out of your inherited IRA. Then your income would be $78,000 for that year. But, with the passage of the SECURE Act this is no longer an option unless the person is the spouse of the deceased.
If your husband or wife inherits your IRA, they may be able to continue to stretch the IRA. There are few other exceptions, but most people cannot stretch the IRA any longer.
The new rule is that when you inherit an IRA, you must take a complete distribution within 10 years.
Due to the recent implementation of the SECURE Act, if you have an estate plan, now may be a good time to review it.
There are several solutions that may help with no longer being able to stretch IRAs that we can discuss in a one-on-one meeting. Just respond to this email or call our office at 864.618.4800 to discuss this further.
If you have had a trust written or an estate plan, you should consider meeting with a qualified estate planning attorney to ensure your documents are still sufficient. We can help direct you in this process.
The final point we’ll cover in this newsletter is that previously if you were over 70.5 you could not fund an IRA even if you were still working. Going forward if you have earned income you can continue to fund an IRA past 70.5.
If you’d like help figuring your situation out or would like a second opinion about how your income plan is setup feel free to call us at 864.618.4800.
Until next time,
David C. Treece,
PS: If you would like a comprehensive Risk Report that outlines any potential gaps your income plan may have just call us at 864.618.4800
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