The Secure Act was signed into law late last year, leaving retirement savers and retirees with little time to digest—and a lot of questions about—a host of new rules that are taking effect in 2020.
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Two changes that created particular confusion revolve around the age when required minimum distributions must be taken from tax-deferred accounts and the age limit for contributing to individual retirement accounts. The Secure Act bumped up the age for RMDs to 72 from 70½ and, as an acknowledgment of people living and working longer, will allow working seniors to continue making IRA contributions after age 70½.
The new rules also upend a strategy surrounding inherited IRAs. Old rules allowed beneficiaries to stretch out RMDs over their lifetime, providing them with years to reap tax-advantaged gains. Now, those IRAs must be depleted within 10 years unless the assets are bequeathed to a spouse or other beneficiary who meets certain exemptions. Some of these exemptions include beneficiaries who are the minor children of the deceased or beneficiaries who are chronically ill or disabled.
For everyone else, the changes mean they will have to take steeper distributions—and pay taxes—when they may not be in need of the funds.
Barron’s has received many reader questions about what the Secure Act’s changes mean for them and how to plan around them. Here, we’ve tapped financial professionals to answer some of those questions:
Q: I turned 70½ in 2019. How do the RMD changes affect me?
A: Barron’s fielded several variations of this question from readers who hit this milestone over the past year or will hit it this year. For them, little has changed.
The changes take effect in 2020, meaning that people who turn 70½ in 2020 can wait until they turn 72 to begin distributions.
But people who turned 70½ by Dec. 31, 2019, would still operate under the old rules. Put another way, someone who was born in the first half of 1949 has to follow the old rules regarding RMDs, while someone who was born in the second half of that year does not.
However, it is possible that the Internal Revenue Service may provide more guidance for the cohort that reached 70½ in 2019, so people are encouraged to consult with their tax planner to discuss their 2020 RMD plans, Fidelity Investments said.
And no, to answer one Barron’s reader’s question: returning an unneeded 2019 RMD to an IRA is not an option.
“While it’s a bit of bad news for people in [that] situation, if you are over 70½ you can still take advantage of qualified charitable distributions,” said Brian Bruggeman, financial planning manager at Baker Boyer Bank in Walla Walla, Wash., referring to a strategy that allows tax-free distributions directly to charities.
Q: I will turn 70½ in February, can I still go ahead and take my first RMD in 2020 i nstead of waiting until I’m 72?
A: While you aren’t required to take a distribution, you may still do so without incurring the 10% early-withdrawal penalty that applies to distributions made prior to age 59½.
However, when you hit 72, then you will be required to follow the regular distribution schedule.
Q: Does the increase to the RMD age for IRAs apply to 457(b) plans?
A: Yes, 457(b), 401(k), and 403(b) are all subject to the new distribution requirements, said Susan MacMichael John, director of financial planning at F.L.Putnam Investment Management.
Q: If we’ve been taking RMDs under a stretch strategy, are we grandfathered in?
A: The good news is that people who were already taking distributions from an inherited IRA may continue to do so under a stretch IRA strategy.
The new rules apply for people who would inherit an IRA from someone who isn’t their spouse and are not subject to other exemptions. Those people will have to deplete the IRA assets within 10 years.
Q: Will the elimination of stretch IRAs apply to Roth IRAs as well as traditional IRAs?
A: Yes. But even though the rules apply to Roth IRAs, there may be cases where some retirees may want to consider converting their traditional IRA into a Roth IRA.
To be sure, a conversion means that the retiree would have to pay taxes on the conversion. Their beneficiaries, however, would be able to take tax-free distributions under current laws. Families are advised to consult with a tax professional to determine if a conversion is the appropriate move for their financial situation.
Q: Will the Secure Act change the present RMD restrictions that require taking RMDs the year after inheriting a non-spousal IRA?
A: There isn’t a simple answer to this question as it depends on the age of the decedent as well as the age and type of the beneficiary.
“If you inherit an IRA, it is best to get some expert advice,” John said. This becomes especially important if the beneficiary of the IRA is set up to be a trust, particularly if the trust is one established for a special-needs family member, she added.
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