Congress Made Significant Changes to Your Retirements Plans

The comedian Stephen Colbert once said in testimony before the House Judiciary Committee, "I'm not a fan of the government doing anything. But I've got to ask, why isn't the government doing anything? ... Like most members of Congress, I haven't read the bill." Colbert was referring to an entirely different issue but Congress actually did something and, as usual, one’s opinion on whether it is good or bad depends on one’s individual circumstances. Here are the highlights of the SECURE Act (even though I haven’t read the bill either):

Required Minimum Distributions (RMDs):

When we pay into our IRAs, 401(k)s, and 403(b)s, we usually make those contributions on a pre-tax basis. The federal government wants that income tax eventually, though, and ensures it does by imposing RMDs on people. If you turned the round age of 70 1/2 prior to December 31, 2019 then you have to take RMDs each year based on a formula. The SECURE Act, however, increases the age one has to take RMDs to 72. That’s good news as it gives your investments more time to grow before you have to start depleting them.

You Must Take Your Inherited IRAs, 401(k)s and 403(b)s Within 10 Years:

As Monty Python used to say, “Now for something completely different.” This, folks, is really different – and significant too.

Before the Act, if you inherited a retirement plan from someone who was already taking RMDs, you too would have to take RMDs, but you could stretch those over your lifetime. For instance, if you inherited your 75-year old Mom’s IRA, you would take RMDs based on your life expectancy. Under the Act, that provision goes away and you must withdraw the entire amount within a decade and pay the required income tax each year. So, under the old way, taking a $1 Million IRA over, say, 25 years would only result in $40,000 of extra taxable income each year. For someone in the 22% tax bracket that would mean about $8800 in extra income tax each year.

Under the new Act, that $1 Million inherited IRA means an RMD of $100,000 extra taxable income each year for 10 years. All of a sudden, your extra income tax becomes $22,000 – an additional $13,200 in taxable income over the old way each and every year for 10 years. Clearly, it’s quite probable that more of your inheritance will go to taxes than before, meaning less inheritance to you. 

This is possibly quite significant for you and your family so now is the time to start planning to deal with this change.

Incidentally, surviving spouses are exempt from the law change as they can still stretch their RMDs over their lifetime.

Contributions to Individual Retirement Accounts (IRAs):

Before the SECURE Act, one could only contribute to an IRA, and receive the tax deduction, before the age of 70 ½. Now, as long as you or your spouse have earned income, you may contribute to your IRA(s) at any age. The maximum, tax-deductible contribution you may make in 2020 is $7,000 per person, assuming you’re 50 or over. It’s $6,000 if you are under 50.

Qualified Charitable Deductions:

Before the SECURE Act, anyone eligible to take RMDs, age 70 ½ and over, could make a donation to a qualified charity directly from your IRA and the contribution not only wasn’t taxed but satisfied the RMD requirement too. For instance, if your RMD was $10,000 and you made a donation directly from your IRA to, say, the YMCA in the amount of $7,000, you would then only have to take an RMD of $3,000 and pay income tax on that amount. You would owe no income tax on the $7,000. The Act maintains that you can still make these types of charitable donations starting at age 70 ½, even if you aren’t required to take RMDs yet. The advantage of this extra flexibility is the ability to make charitable donations without ever having paid income tax on the money you contribute.

If you’re still reading this level of detail, feel free to pass Go and collect $200. If I lost you at Stephen Colbert, call us if you think the Act’s changes may apply to you and you need guidance.

Steve Byars, CFP®