Contending With Accelerated Distributions Under The SECURE Act – Disclaimers

By now, most of you are aware of the massive changes made by the SECURE Act to the IRA distribution rules. These new rules affect the beneficiaries of IRAs or other tax deferred retirement accounts whose owners die after December 31, 2019. Under the new rules, most non-spouse beneficiaries must completely liquidate an inherited IRA or other tax deferred retirement account by the end of the 10th year following the year of the account owner’s death.

The new rules do not mandate periodic distributions for those subject to the 10 year rule, merely a complete liquidation by the deadline. Many IRA beneficiaries will likely incur substantially larger tax bills due to the bunching of IRA distributions into this compressed time frame. However, a beneficiary may avoid those anticipated tax liabilities by disclaiming her rights in the inherited IRA.

A disclaimer is the refusal to take possession, or enjoy the benefit of an IRA belonging to a deceased person. It’s a legal “no thank you.” A beneficiary may disclaim all or a part of the IRA.

Done correctly, a disclaimer permits an IRA beneficiary to avoid all income tax liability otherwise due on the receipt of the account. To be eligible to disclaim, the beneficiary must not have benefitted in any manner from the IRA.

Further, the disclaimer must be in writing, irrevocable and unqualified, and delivered to the person possessing or having custody of the asset no later than the date which is 9 months after the date of the account owner’s death. If those conditions are met, the taxpayer avoids all tax liability due and payable with respect to the inherited IRA.

Note that there are other reasons besides taxes that a beneficiary may desire to disclaim an IRA inheritance. The beneficiary may not need the money and the IRA may be more useful to a co-beneficiary or a contingent beneficiary. Alternatively, the IRA beneficiary may have debt issues and desires to protect the account from his creditors by disclaiming it to another.

The disclaimer is a powerful tool available to IRA beneficiaries for post-death planning that shouldn’t be overlooked. A disclaimer lets the beneficiaries control where an IRA will go after the death of the owner to best meet the beneficiary’s own goals and objectives.

Are you having difficulties trying to manage distributions from an IRA or other retirement account? Give me a call, I can help.

IRS Issues New RMD Life Expectancy Tables

The Internal Revenue Service recently issued new RMD (required minimum distribution) life expectancy tables to be used by account owners and beneficiaries to calculate RMDs from traditional IRAs and other retirement accounts. The new tables are effective for RMDs taken after 2021.

Those who take only the minimum amount required by the IRS each year will see smaller RMDs each year and greater opportunity for tax deferred growth.

There are 3 life expectancy tables used to calculate RMDs:

Uniform Lifetime Table. This table is used in most cases by an owner of a traditional IRA or other tax deferred retirement account. It does not matter whether the account owner is single or married. (Owners of Roth IRAs are not subject to minimum distribution rules.)

Joint & Last Survivor Table. This table is used primarily by an owner of a traditional IRA or other taxable retirement account if the owner’s spouse is the sole account beneficiary and is more than 10 years younger than the account owner.

Single Life Table. This table is used by the beneficiary of an inherited retirement account (traditional or Roth) if: a) the account owner died before January 1, 2020; or b) the account owner died after December 31, 2019, and the beneficiary is an eligible designated beneficiary (EDB). An EDB is a surviving spouse, a minor child, a disabled or chronically ill individual, or an individual not more than 10 years younger than the deceased account owner. An individual who does not qualify as an EDB must liquidate the entire balance of an inherited account within 10 years of the year of the account owner’s death.

Remember, the new tables must be used to calculate annual RMDs taken after calendar year 2021. Roth IRA owners are not subject to RMD rules, but Roth IRA beneficiaries are. Regardless of the type of account, RMDs are not required for 2020.

You may read the IRS publication here.

Having difficulty calculating RMDs or managing distributions from a retirement account? Give me a call, I can help.

Inheriting an Inherited IRA – It’s complicated!

In my last post, I outlined the key points to keep in mind when dealing with an inherited IRA. Unfortunately, the discussion may not end there. You may be the successor beneficiary of a previously inherited IRA.

In this situation, the IRA or other account was inherited by a prior beneficiary following the account owner’s death. Oftentimes the original account beneficiary will pass away before the IRA is completely liquidated. If that is the case, the successor beneficiary must know how the distribution rules will impact her.

The analysis begins by determining the date the original beneficiary inherited the IRA. (This is the date of the IRA account owner death.) Under current tax rules, if the IRA’s original beneficiary inherited the account on or before December 31, 2019, the distribution rules applicable to a successor beneficiary will differ from the rules that will apply if the original beneficiary inherited the IRA after December 31, 2019. Let’s look at each situation:

Did the original beneficiary inherit the IRA on or before December 31, 2019? If so, the successor beneficiary will have 10 calendar years following the year of the original beneficiary’s death to completely liquidate the IRA. This 10 year liquidation period will apply to any individual named a successor beneficiary. For instance, if the successor beneficiary is the original beneficiary’s spouse, he or she must liquidate the entire balance of the IRA with the 10 year term.

The successor beneficiary is not required to withdraw a minimum amount each year during the term. She may wait until the very end of the term to liquidate the IRA. The IRS will penalize her if she does not fully liquidate the account by the end of the 10 year term. The penalty will be equal to 50% of the balance remaining in the IRA at the end of the term. The IRS will levy the penalty each year until the IRA is liquidated.

Did the original beneficiary inherit the IRA after December 31, 2019? If the original IRA beneficiary inherited the account after December 31, 2019, the distribution rules applicable to the successor beneficiary will depend upon the status of the deceased original beneficiary at the time of his death. If the original beneficiary was an “eligible designated beneficiary,” or “EDB” (defined by the tax code), the successor beneficiary will have 10 years from the year of the original beneficiary’s death to liquidate the IRA.

An EDB may be: a) the surviving spouse or a minor child of the account owner: b) a disabled or chronically ill individual: or c) an individual not more than 10 years younger than the deceased account owner. The tax code deems all other individual beneficiaries to be “designated beneficiaries.” (A successor beneficiary will never be an EDB under the tax code.)

If the original IRA beneficiary was merely a designated beneficiary, then the successor beneficiary has only the remainder of the original beneficiary’s 10 year term to complete the IRA liquidation. She does not get a new 10 year term to liquidate the IRA.

Again, the required minimum distribution rules do not apply. However, the IRS will impose the 50% penalty if the account is not fully liquidated by the end of the original beneficiary’s 10 year term. A successor beneficiary will have to move quickly to liquidate the IRA if the original beneficiary died late in the last year of the 10 year term.

One must be on their tippy-toes in any situation involving an inherited IRA or other retirement account. She must be especially careful if inheriting a previously inherited IRA.

If you or someone you know is struggling to manage an inherited IRA or other retirement account, give me a call. I can help.

A Few Pointers About That IRA You Just Inherited.

According to Forbes Online, the largest private transfer of wealth will take place over the next 30 – 40 years as members of the Baby Boomer generation pass their wealth on to younger generations. Some estimates are that $30 trillion will change hands. A large portion of that wealth is held in tax deferred or tax free IRAs (traditional and Roth and other tax deferred retirement accounts. If you inherit an IRA, and aren’t the surviving spouse, there are major rule differences that you must heed.

First, the rules that govern distributions from an inherited IRA will differ depending upon the beneficiary’s classification. If the account owner died after December 31, 2019, only an “eligible designated beneficiary” may take distributions from an inherited IRA over her remaining life expectancy. Individuals who are “eligible designated beneficiaries” under the tax code are: a surviving spouse; a minor child; a disabled individual; a chronically ill individual; or an individual not more than 10 years younger than the deceased account owner. If you do not fall into one of those categories, you are deemed to be a “designated beneficiary,” and you must liquidate the entire balance of the inherited IRA (traditional or Roth) within 10 years of the year of the account owner’s death.

As a designated beneficiary, you are not required to take periodic distributions (such as an annually) from the account. The tax code merely requires that all of the money be withdrawn by December 31 of the 10th year following the year of the account owner’s death. You can wait until the very end of the liquidation window before withdrawing the balance of the account. But remember, if the account is a traditional IRA, distributions will be taxable income to you, so it may make sense to take periodic distributions to reduce the income tax bite. Distributions from an inherited Roth IRA are not income taxable.

Second, you cannot roll over an inherited IRA like you can your own account. While you inherited the account, you are not considered the account owner under the tax code. That is why the deceased owner’s name must be on the account title “for the benefit of” the beneficiary. If you do try to roll a traditional IRA over into an account in your own name, you have made an irreversible taxable distribution! So too with an inherited Roth IRA. While the distribution may not taxable, it cannot be reversed. All the potential future tax-free growth will be lost.

However, you may directly transfer an inherited IRA from one custodian to another. In this type of transfer, the account balance is sent directly from the old custodian to the new one. Caution! – You cannot directly transfer money from an inherited IRA to your own IRA in hopes of avoiding the rollover prohibition. The IRS will consider that to be an irreversible distribution as well.

Third, you cannot contribute to your inherited IRA. If you would like to put money away for your retirement, you will have to open your own IRA.

Fourth, if you are under age 59½, the 10% early withdrawal penalty will not apply to distributions from your inherited IRA. The rule does not apply to forced distributions from an inherited account.

Finally, you cannot convert your inherited traditional IRA to a Roth. Not only is this deemed to be an irreversible taxable distribution, but the funds cannot then be deposited into a tax-free Roth account. Any future earnings on the remaining balance will be subject to taxation.

If you are struggling to manage your inherited IRA, give me a call. I can help.

COVID-19 Bill Eases Rules for Retirement Accounts.

The COVID-19 stimulus (CARES Act) signed by President Trump last week includes some important tax relief for older retirement account owners.

First, The required minimum distribution (RMD) rules for Individual Retirement Accounts and 401(k)s are waived for 2020. If you haven’t taken your RMDs for 2020 yet, or have some RMDs left to take, you can leave the money in the account. The waiver applies to inherited retirement accounts as well.

This could be a bigger benefit than one might think. A 2020 RMD is based upon the account’s value as of December 31, 2019. If the value of a retirement account took a nose dive, the 2020 RMD (based upon a pre-correction value) would take a larger percentage of the account’s current value than otherwise would have been taken but for the correction. This waiver will give one’s retirement account a chance to recover without having the depletion caused by a forced RMD.

In addition, the IRS has extended the tax-filing deadline for 2019 federal income tax returns from April 15 to July 15. The extension postpones the deadline for making a prior-year contribution (for 2019) to a traditional and Roth IRAs to July 15. Be sure to indicate to the IRA custodian that the amounts contributed before July 15, 2020, are a 2019 prior-year contribution.

The CARES Act also waives the 10% pre-age 591/2 early distribution penalty on distribution of up $100,000 from IRAs and other retirement plans for individuals who meet the requirements of being affected by the coronavirus. Income taxes would still be due on pre-tax distributions, but could be spread evenly over three years, and the funds could be repaid anytime during the three years. Finally, rules for plan loans are relaxed for those who meet the definition of being affected by the coronavirus. Loan limits are increased and repayments postponed.

If you need assistance with your financial or retirement planning, give me a call, I can help.

Stay safe; wash your hands frequently!

Taking a Closer Look – The SECURE Act’s “Eligible Designated Beneficiary.”

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act became law on January 1, 2020. The SECURE Act made major changes to the distribution rules governing inherited IRAs (both traditional and Roth) and company sponsored retirement plan accounts. In general, the Act requires a designated beneficiary of an inherited retirement account to withdraw the entire balance from the account within 10 years of the year of the original account owner’s death if the account owner dies after December 31, 2019.

However, the SECURE Act carved out a class of beneficiaries who remain eligible to take distributions from an inherited retirement account using the old life expectancy rules. Beginning January 1, 2020, an individual who qualifies as an “eligible designated beneficiary” may continue to use the life expectancy method to calculate minimum annual distributions from an inherited IRA or other retirement account. Those individuals eligible to use this technique are: (i) surviving spouses; (ii) children of the account owner who have not reached majority; (iii) disabled individuals; (iv) individuals who are chronically ill; and (v) beneficiaries not more than 10 years younger than the deceased account owner. All but the surviving spouse category bear a closer look.

Child of the account owner who has not reached majority. People may assume the term “majority” as used in the Act means age 18. For purposes of the new rules, a child could reach the age of majority at age 26. Under current Internal Revenue Code and Regulations, a child may be treated as not having reached the age of majority until age 26 if they have not completed a “specified course of education.” Thus, if both conditions are met, a surviving child of the deceased account owner may use the life expectancy method of calculating distributions until age 26. However, this may change with future regulations. Nevertheless, when the child reaches majority, he must then switch to the new 10 year distribution rule with regard to any funds remaining in the inherited account. This category excludes grandchildren of the deceased account owner.

Furthermore, a child who is disabled as defined in the Internal Revenue Code when he reaches majority may continue thereafter to use the life expectancy method of calculating minimum annual distributions so long as he continues to be disabled.

Disabled persons. Not all disabled persons may use the life expectancy method of calculating minimum annual distributions from an inherited retirement account. Under the Act, an individual is considered to be disabled if she is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration. (This is the same definition used to determine whether a pre-age 59½ withdrawal from an IRA will be subject to the 10% early withdrawal penalty.) The beneficiary must provide proof of her disability. If the beneficiary does not meet, or no longer meets this definition of “disabled,” she must use the 10 year distribution period mandated by the Act.

The chronically ill. Under the Act, a “chronically ill individual” is one who has been certified by a licensed health care practitioner as: (i) being unable to perform at least two activities of daily living for a period that is indefinite and reasonably expected to be lengthy in nature due to a loss of functional capacity , (ii) having a level of disability that is similar to the level of that described in clause (i) above, or (iii) requiring substantial supervision to protect the individual from threats to health and safety due to cognitive impairment. If the beneficiary is deemed to be chronically ill, he may use the life expectancy method to calculate minimum annual distributions from an inherited retirement account. This definition is stricter than the definition found in a typical long term care insurance policy, which will require that an individual be unable to perform activities of daily living for at least 90 days to be deemed “chronically ill.”

Individuals not more than 10 years younger than the deceased account owner. This category of eligible designated beneficiary includes surviving siblings, a domestic partner, or friends of the deceased account owner if they are not more than 10 years younger than the deceased. Any beneficiary falling within this category may use the life expectancy method of calculating required annual distributions from an inherited retirement account.

For any designated beneficiary who is not an eligible designated beneficiary under the Act, he or she must withdraw the entire balance of an inherited retirement account within 10 years after the year of the death of the account owner if the death occurs after December 31, 2019.

The SECURE Act brought significant changes to an already complex area tax law and will have an impact on many financial and estate plans. As with any tax law change, one should review their financial or estate plan to determine how these changes may affect them.

Do you need help understanding the impact the SECURE Act has on your current planning, or need help determining how best to adapt your financial or estate plan to the new law? Give me a call, I can help.

Considering the Stretch IRA Rules After the SECURE Act.

As a financial and estate planning technique, the “stretch” IRA allowed the beneficiary of an inherited IRA to take distributions from the IRA over her remaining life expectancy, extending the life and income tax advantages (tax-deferred or tax free growth) of the IRA. For a very young beneficiary, this could have been a virtual lifetime. That all changed with the recent passage of the SECURE (“Setting Every Community Up for Retirement Enhancement”) Act.

The SECURE Act severely curtailed the viability of the “stretch” technique for distributions from inherited IRAs, both traditional and Roth. Under the Act, most non-spouse beneficiaries will have to withdraw all of the funds from an inherited IRA within 10 years of the death of the original account owner. The new rules apply to traditional or Roth IRAs inherited after December 31, 2019.

Beginning January 1, 2020, only an “eligible designated beneficiary” may continue to use the stretch technique for distributions from an inherited IRA. Under the SECURE Act, those beneficiaries eligible to use the stretch technique are: i) surviving spouses; ii) minor children of the account owner – until age of majority (but not grandchildren); iii) disabled individuals; iv) individuals who are chronically ill; and v) beneficiaries not more than 10 years younger than the deceased account owner.

If an individual does not qualify as an eligible designated beneficiary under one of those 5 categories, she must use a new 10 year rule – the entire account balance must be withdrawn by December 31 of the 10th year following the year of the account owner’s death. Note too, that a minor child of a deceased account owner may use the old life-expectancy distributions rules until she reaches the age of majority, and then must switch to the 10 year rule thereafter.

Of course, if an IRA owner died before January 1, 2020, the old stretch IRA distribution rules still apply.

Caveat: While this post focuses on the SECURE Act’s impact on distributions from traditional and Roth IRAs, the new rules affect distributions from all inherited qualified retirement plan accounts, including SEP IRA, SIMPLE IRA, 401(k), and 403(b) accounts.

The SECURE Act adds a thick layer of complexity to an already confusing area of tax law. As with any tax law change, one should review their financial and estate plans to better understand how the SECURE Act may affect those plans.

Do you need help understanding the impact the SECURE Act has on your current planning, or need help determining how best to adapt your financial or estate plan to the new law? Give me a call, I can help.

Need to take an IRA RMD before the end of the year? Why not make a tax-avoiding QCD instead?

IRA owners must begin taking annual required minimum distributions (RMD) once they reach age 70½. An RMD is taxable as income for the year in which the RMD is taken. A lot of my clients dislike RMDs because they are a forced distribution – by law, an RMD must be taken after age 70½ whether or not the client wants the distribution. For these clients, the RMD unnecessarily pushes up their taxable income and consequently their income tax bill.

So what can a taxpayer do to eliminate, or at least reduce the income tax liability that comes with the RMD? Enter the qualified charitable distribution (QCD).

A QCD allows a taxpayer to transfer an RMD from an IRA directly to a qualifying charity without the taxpayer including the RMD amount in taxable income. The amount contributed to charity via the QCD (up to a limit of $100,000) may be excluded from adjusted gross income while satisfying that year’s RMD. The QCD exclusion is allowable regardless of whether the taxpayer takes a standard deduction or itemizes deductions. The QCD amount may not be taken as a charitable deduction if one itemizes. The benefit of the QCD is the exclusion of the QCD amount from adjusted gross income for the year in which the QCD is taken.

There are several important rules that apply to QCDs. First, the account from which the QCD is made must be an IRA, and the amount must be taxable funds (neither nondeductible contributions nor after-tax rollover funds may be used for the QCD). The IRA may be a traditional, inherited, or an inactive SEP or SIMPLE IRA. A taxpayer may not make a QCD from a 401(k) or other employer sponsored retirement account.

Second, the taxpayer must have reached the age of 70½ before the QCD is made. It isn’t enough that one turns age 70½ during the year. The QCD must be made after the date the taxpayer reaches age 70½.

Third, the charity receiving the QCD funds must be a qualifying 501(c)(3) organization. A QCD is not available for a contribution to a private foundation or a donor-advised fund.

Fourth, the amount of the QCD is capped at $100,000 per year per taxpayer. Thus, taxpayers who must take an RMD of more than $100,000 will still be required to include in adjusted gross income that portion of the RMD that exceeds the $100,000 QCD limit. However, if the taxpayer is married and files jointly, both spouses can make a $100,000 QCD from their separate IRAs.

Finally, the QCD must be made via direct transfer from the IRA to the charity. The check cannot be made out to the taxpayer. If the check is made payable to the taxpayer, he may not later give those funds to charity for the QCD, and the amount of the distribution must be included as income on the taxpayer’s return.

A QCD can be a powerful tool to help avoid income taxes when faced with mandatory RMDs. However, the rules governing RMDs and QCDs are many and complex. Make sure you are working with a qualified professional.

Have questions about QCDs, or RMDs in general? Contact me, I can help.

How Will the SECURE Act Affect Your Retirement Savings?

Having passed the US House of Representatives and now moving quickly through the US Senate, the SECURE (Setting Every Community Up for Retirement Enhancement) Act appears to be on its way to soon becoming law. The SECURE Act will make numerous changes to how money is contributed to, and withdrawn from retirement accounts. While many of the Act’s provisions are administrative in nature, that is, they deal with the way retirement plans are administered, several provisions will directly affect retirement savings and withdrawals. Here are some of the more important ways the SECURE Act could affect your retirement savings:

First, the Act pushes back the time when retirement savers must begin taking distributions from their IRAs and other retirement accounts. Under current law, a person is required to begin taking retirement account distributions at age 70½, whether or not he or she wants to. The SECURE Act will push the age when required distributions must begin to age 72. This means that retirement savings may continue to grow untouched and untaxed for another year and a half before distributions must begin.

Next, the SECURE Act eliminates the age restrictions on IRA contributions. Americans are living and working longer. However, under current law a person may not contribute to an IRA after age 70½, even if still working. Under the SECURE Act, a person may continue to contribute to an IRA after age of 70½ if still working.

Finally, the SECURE Act changes the required minimum distribution rules with respect to IRA and other retirement account balances upon the death of the account owner. Under the Act, distributions to individuals other than the surviving spouse of the account owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the account owner, or child of the account owner who has not reached the age of majority, are generally required to be distributed by the end of the tenth calendar year following the year of the account owner’s death.

Under current law, a non-spouse beneficiary of an IRA or defined contribution-type retirement account [such as a 401(k) or 403(b) account] may elect to “stretch” distributions from an inherited retirement account over his or her remaining life expectancy. For younger beneficiaries, this means that the remaining account balance has a longer time to grow tax deferred before being withdrawn, and the amounts withdrawn may be taxed at lower rates. The SECURE Act will accelerate distributions from inherited retirement accounts, reducing the time horizon for tax deferred growth and increasing the taxes that must be paid on the larger withdrawals.

This change will have an impact on beneficiary designations and estate plans, especially those situations in which a trust is named as a beneficiary of a retirement account.

Insofar as the SECURE Act will affect retirement saving and distributions in these and other ways, readers should plan to meet with a qualified legal or financial professional to determine the best way forward under the Act should it become law.

If you don’t have an attorney or financial planner, but would like to work with one, please give me a call. I can help.

Middle Aged Man Dies Leaving Substantial IRA With No Beneficiary – What Happens Next?

A client, “Susan,” contacted me recently to help settle the affairs of her recently deceased son, “Frank.” Frank owned a traditional IRA that has a fairly substantial balance. Unfortunately, Frank did not list a beneficiary for the account. Shelly is Frank’s only living heir. Frank was 57 when he died in 2018. What are Susan’s options with regard to Frank’s IRA?

Because Frank’s IRA had no identifiable beneficiary, by default the IRA is payable to his estate. And since Frank died before age 70½, a special 5-year rule applies to the distribution of his IRA. In general, the entire balance of Frank’s IRA must be distributed by December 31 of the year containing the fifth anniversary of Frank’s death. In this case, the entire balance of Frank’s IRA must be distributed by December 31, 2023.

An estate does not have a life expectancy, so distributions cannot be “stretched” beyond the 5 years. However, the entire account balance does not have to be taken in one distribution, it can be broken up over multiple years to reduce the taxes payable as long as the entire account balance is distributed before the end of the fifth year following the year of the account owner’s death.

(Now, had Frank died after April 1 following the year he attained the age of 70½, Susan would have been able to stretch distributions from Frank’s IRA to the estate over his remaining life expectancy, avoiding the special 5-year distribution rule.)

If the entire account balance is not withdrawn by the end of the fifth year following Frank’s death, then the IRS could impose a penalty equal to 50% of the balance remaining. The penalty could be waived by the IRS if it finds there was a reasonable basis for the error.

Failing to designate a beneficiary of an IRA (or other retirement account for that matter) is one of the costliest mistakes you can make. Two problems are created: First, because distributions cannot be “stretched” beyond 5 years, there is little tax-deferred growth that can be achieved in such a short period of time. Second, since distributions from the account must be accelerated, the larger distributions create larger income tax bills.

It always pays to double check beneficiary designations on your retirement accounts (and life insurance, too). I recommend at least annually. Make sure you have beneficiaries named on all of your accounts, and to make sure those beneficiary designations are up to date. Has a beneficiary died, or is there some other reason to replace a beneficiary? If so, update your beneficiary designations immediately.

Do you have an issue concerning distributions from a retirement account, or planning for distributions from a retirement account? If so, call me, I can help.