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!

The SECURE Act Sets a Tax Trap for IRA Beneficiary Trusts.

The newly enacted Setting Every Community Up for Retirement Enhancement (“SECURE”) Act made major changes to the distribution rules for inherited IRAs. With few exceptions, the SECURE Act replaced the old life expectancy “stretch” IRA distribution rules with a mandatory 10 year distribution rule. This creates a potential tax trap for certain trusts named as an IRA beneficiary.

People frequently designate a trust as an IRA beneficiary. These trusts, often referred to as IRA beneficiary, or inheritance trusts, are designed to control and manage IRA distributions for beneficiaries. One popular type of IRA beneficiary trust is known as an “accumulation” trust.

An accumulation trust is frequently used in situations where the trust beneficiary may be unable to directly manage IRA distributions. An accumulation trust requires the trustee to retain IRA distributions in the trust. The trust does not pay out an IRA distribution to the beneficiary in the year received. The trust dictates the if and how IRA distributions will be paid to the trust beneficiary.

With few exceptions, the entire balance of an inherited IRA must now be distributed to the trust within 10 years of the account owner’s death. These distributions will be taxed at trust income tax rates because they are kept in the trust. An IRA distribution that exceeds $12,750 will be taxed at the highest marginal rate of 37%! Unless the IRA balance is very small, taxes will take a huge portion of IRA distributions, leaving a lot less for the trust beneficiary.

The SECURE Act’s 10 year distribution rule will impose significant tax burdens on many existing trusts and estate plans. More than ever you need to work with a qualified advisor who can help guide you through all the new rules and ensure you make the right decisions with respect to any changes to your retirement or estate planning.

Do you need help determining how best to best adapt your retirement or estate plan to the SECURE Act? Give me a call, I can help.

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.

The SECURE Act Becomes Law – How Will it Affect Your Financial and Estate Planning?

The SECURE Act, which passed the US House of Representatives last summer (2019), had been flying well below most people’s radar as it seemed to lose steam in the Senate, despite bipartisan support. However, quite surprisingly and with little fanfare, it was passed into law just before Christmas, and took effect January 1, 2020.

In brief, the SECURE Act changes the age when one must begin taking distributions from qualified retirement accounts, changes provisions regarding contributions to IRAs and penalty-free withdraws from retirement accounts, as well as beneficiary distribution rules for inherited retirement accounts.

For those individuals who are currently working and saving for retirement, the SECURE Act removes the age limit for contributions to traditional IRAs. Under the old rules, a taxpayer could not contribute to a traditional IRA after reaching age 70½, regardless of whether he was employed. The SECURE Act removed that age limit. Now, you may contribute to an IRA regardless of your age, as long as you are working and have earned income. This change will help boost retirement savings for older taxpayers.

In addition, the SECURE Act raises the age at which one must begin taking distributions from retirement accounts. As of January 1, 2020, the age at which require minimum distributions must begin is 72. So, if you reach age 70½ in 2020, you can relax. You may wait until April 1 following the year in which you turn 72 to begin taking distributions from your retirement accounts. If you reached age in 70½ in 2019, the rules have not changed. You must still take your initial RMD before April 1, 2020, if you did not take it before the end of 2019.

The SECURE Act also eliminates the 10% penalty for early withdrawals from a retirement account in situations involving the birth or adoption of a child. In such cases, up to $5,000 may be withdrawn from a retirement account, penalty free, within a year of a birth or adoption of a child. The withdrawn funds may be re-contributed to the account at a later date.

Likely the most significant changes brought by the SECURE Act involve distributions from retirement accounts after the death of the account owner. Under pre-2020 law, an important planning strategy for retirement accounts was to name a spouse, child, or others as account beneficiary to allow for post-death distributions to be extended, or “stretched,” over the beneficiary’s remaining life expectancy. This had the affect of prolonging the tax deferral of investment gains in a retirement account and reducing the amount a beneficiary was required to withdraw each year.

Under the SECURE Act, the “stretch” is eliminated for most non-spouse beneficiaries. For those affected beneficiaries, all funds in a retirement account will have to be distributed within 10 years of the year of the account owner’s death. This will have the effect of increasing the amount of each year’s distribution from a retirement account and the taxes to be paid on those distributions.

Surviving spouses are excluded under the Act, and still have the option of stretching distributions over their remaining life expectancy. Minor children are also exempt from the new rules until they reach the age of majority. Finally, certain disabled and chronically ill beneficiaries and beneficiaries who are not more than 10 years younger than the account owner are also exempt.

The SECURE Act does not apply to retirement accounts owned by individuals who died before January 1, 2020. The old stretch rules will continue to apply.

Whenever significant law changes occur, it’s important to understand the real or potential impact it may have on your financial and estate planning. You should always work with a qualified, knowledgeable and trusted advisor.

If you have questions regarding the SECURE Act’s possible impact on your planning, give me a call. 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.

April 1 Deadline to Receive first RMD Looms.

For all of you out there who turned age 70½ in 2018, you must start receiving required minimum distributions (RMDs) from your traditional IRAs and employer sponsored plans [401(k), 403(b), etc.,] by April 1, 2019.

The April 1 deadline applies to all employer sponsored plans and traditional IRAs and IRA-type plans, such as SEPs, SIMPLEs, etc. The deadline does not apply to Roth IRAs.

The April 1 deadline only applies if you did not receive your initial RMD in 2018. In addition, the April 1 deadline only applies to the RMD for the first year (2018). For all subsequent years, beginning with 2019, RMDs must be received by December 31. If you turned 70½ in 2018, but did not receive the first RMD from your IRA or other employer sponsored plan accounts by December 31, 2018, then you must take the RMD for 2018 before April 1, 2019. You still must receive the RMD for 2019 by December 31, 2019. So you will have to take two distributions in 2019, one for 2018 by April 1, and the second for 2019 before December 31.

Even though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, those who are still employed may (if the plan allows) delay taking RMD distributions from their workplace plans until April 1 of the year after the year they retire. Still-working employees cannot, however, delay taking RMD from traditional IRAs beyond April 1 after the year they turn age 70½ . This “still-working” exception only applies to workplace plans that permit a delay.

There is less than 1 month to the April 1 deadline. It is important to remember that the distribution must be received by April 1. It isn’t good enough to request the distribution from your IRA custodian. If it isn’t received by April 1, you will still be taxed on the amount of the first year RMD that should have been received, and the IRS will impose a penalty equal to 50% of that RMD. Ouch!

If you are faced with the April 1, deadline to receive your first RMD, and are not sure how much you are required to take or how to do it, give me a call, I can help.

Frozen Pension Benefit – Do You Take the Lump Sum?

It’s a difficult question without an easy answer. For many, income security in retirement depends upon getting the answer right.

Employers have been fazing out pension programs for many years now, replacing them with 401(k) and similar employee-contribution type plans. Many of these fazed out pensions were frozen, leaving participant employees eligible to receive at least some benefit from the pension plan. For those who are entitled to a benefit from a frozen pension plan, many have the option to receive an up-front lump sum payment of their accrued pension benefit in lieu of a lifetime monthly annuity payment.

Faced with that option, do you take the money, or settle for the lifetime annuity? The knee-jerk reaction of many is to take the lump sum. I’ve seen lump sum offerings in the six-figures, a pretty significant chunk of change. But even then it’s not an easy question to answer, especially for those who have limited savings or other income resources beyond Social Security. Will that lump sum be enough to see you through for the rest of your life?

When you retire, a primary goal is to have sufficient income to cover living expenses for the rest of your life, regardless of how long you live, factoring in economic conditions such as inflation, and fluctuations in the financial markets. For married couples, that income must last for two lifetimes. To complicate things further, if you are like most people that I’ve work with, you will underestimate how long you will live in retirement. (Everyone faced with the lump sum payment question thinks they’re going to die in a car accident tomorrow so they want the money today.) But for a married couple in their middle sixties, it is reasonable to expect at least one spouse will live into their 90s. Living 3 decades in retirement is becoming commonplace.

If you elect the annuity, you (and even your spouse with certain elections) will get a check every month for the rest of your life, no matter how long you live. You bear no risk.

Suppose you decide to take the lump sum. You’ll receive a single payment from the pension plan regardless of how long you end up living. Now you have to invest that money to generate an income stream that will last the rest of your lifetime. How long will that be; and how confident are you the money will last that long? It depends upon many factors, but that risk is on you. And you don’t want to run out of money during retirement.

So what’s the answer – do you take the lump sum or settle for the annuity? Let’s look at some of the factors that can play into that decision:

If you (and your spouse if married) are in good health, and the security of a lifetime income stream is important to you, the annuity makes sense. If you are not comfortable handling your own investments, the annuity lets you leave investment decisions to the pension plan. If you are pessimistic about the economy, inflation, or other risk factors in the future, you can leave that risk with the pension plan choosing the annuity option.

The lump sum option may make sense if you (and your spouse if married) are older and in poor health. If you have sufficient savings and investments that the annuity would not be a needed source of lifetime income to make ends meet, then the lump sum may be the better choice. Also, if you are confident in your abilities to manage your investments to generate a good rate of return, and can prudently manage withdrawals from savings and investment over your retirement years, the lump sum may be appropriate.

In any event, if you are offered a lump sum payment as an option from a frozen pension plan, it is crucial to work with a competent advisor who can help you make a proper decision that meets your goals and objectives in light of your financial situation. Avoid an advisor who has a vested interest in your opting for the lump sum – like they want to manage and invest the money (for a fee).

If you are struggling with the lump sum vs. annuity question, give me a call, I can help.

Retirement Savers Get a Boost – IRA Contribution Limits Increased for 2019.

There is good news for those of you who are actively saving for retirement. The IRA contribution limit, presently $5,500 for 2018, will increase to $6,000 for 2019. If you are age 50 or older in 2019, you can add an additional $1,000 to your IRA, for a total contribution of $7,000 for 2019. The increase applies to both traditional and Roth IRAs. This increase applies to contributions for the 2019 tax year, not for contributions made in 2019 for the 2018 tax year.  Non-working spouses may also benefit by making contributions to their own IRAs to boost retirement savings.

The increase is the result of cost-of-living adjustments made recently by the IRS to retirement account limits. This increase is the first since 2013!

Don’t forget, other IRA eligibility rules still apply. You must have earned income to contribute to an IRA. Generally, earned income is income from employment. Investment income and Social Security income is excluded. Furthermore, there are income limits that will affect your ability to make a fully deductible contribution to a traditional IRA. Your income may be too high to contribute to a Roth IRA. Finally, you cannot make a contribution to a traditional IRA in 2019 if you will be age 70½ or older.

For those of you participating in an employer sponsored 401(k) or 403(b) plan, the limit for salary deferrals into those types of plans will go up to $19,000 in 2019 ($25,000 if you are age 50 or older).

You can see all of the COLA increases for retirement accounts and other retirement related items HERE.

Having trouble putting together a retirement plan, or looking for ways to boost retirement savings?  Give me a call, I can help.