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beneficiary under one of those 5 categories, she must use a new 10 year rule – the entire account balance must be withdrawn by December 31 of the 10th year following the year of the account owner’s death.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.

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.

NBI Seminar: What You Need to Know About Probate & Trust Administration

The National Business Institute (NBI) is offering a day-long seminar entitled “Probate & Trust Administration – What You Need to Know About Probate and Trust Administration,” on August 19, 2019, at the Wyndham Garden in Ann Arbor, Michigan.

(Full disclosure: I am one of the presenters.)

Program Description (From NBI):

Working through issues that arise through probate and trust administration can be daunting. Are you well-equipped with the tools you need to succeed? This insightful course will take you through steps in probate administration, including information on creditor and debt issues, tax and more. You will also get valuable insight on trust administration, including the handling of accounting, distributions and taxes. Don’t miss this opportunity to hone your probate and trust administration skills – register today!

  • Take a closer looks at the initial step for filing the estate.
  • Discuss what needs to be done to handle creditor claims and debts.
  • Make sure everything is in order for the final distribution of the estate.
  • Review what issues need to be addressed concerning taxes in probate administration.
  • Get the latest information on taxation concerns associated with trusts.
  • Explore the different types of trusts and how they are used.
  • Learn ways to manage, sell and distribute property and assets in trust administration.
  • Gain a better understanding of the distinctions between trust fiduciary accounting and income tax accounting.

This basic level seminar is designed for professionals who want to be more effective in the probate and trust administration process, such as:

  • Attorneys
  • CPAs and Accountants
  • Tax Professionals
  • Financial Planners and Wealth Managers
  • Trust Officers
  • Paralegals

Course Content:

  • Probate Process and Overview
  • Assets, Creditor Claims and Debt Considerations
  • Distributions, Final Accounting and Closing the Estate
  • Tax Issues in Probate Administration
  • Trust Taxation Issues
  • What You Need to Know About Trusts
  • Accounting/Distributions in Trust Administration
  • Ethics and Estate Administration

For more information and to register, please follow the link to:

“Probate & Trust Administration.”

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.

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.

Costly IRA Rollover Mistake – Easily Made; Impossible to Fix.

The rules governing IRA accounts are maddeningly complex, especially the rules for inherited IRAs. I was working with a client on an issue involving the control of an inherited IRA account when I was reminded of a case that shows just how easy it is to make a mistake that cannot be fixed.

Mrs. Beech was the adult beneficiary of her deceased mother’s traditional IRA. The account was managed by a professional money management firm, Citi Smith Barney. Citi made two distributions to Mrs. Beech from the IRA – one for $2,828, and the second for $35,358. The larger distribution was made on May 23, 2008, and the check was made out to Mrs. Beech.

Mrs. Beech deposited the $35,358 into the inherited IRA with American Funds in June 2008. Mrs. Beech reported both distributions on her 2008 income tax return, and reported the smaller $2,828 amount as the taxable amount of the distribution. Thereafter, the IRS issued Mrs. Beech a notice of deficiency for income taxes due in the amount of $9,212 for the $35,358 distribution, plus penalties in the amount of $1,842. The deficiency and penalties were sustained by the United States Tax Court.

Wait a second! Mrs. Beech deposited the distribution check for $35,358 into a new inherited IRA account well within 60 days from the date the check was issued by Citi. What did she do wrong?

Amounts paid or distributed from a traditional IRA are generally includible in gross income by the recipient payee. The Internal Revenue Code (the “Code”) provides that a distribution is not includible in gross income if the entire amount of the distribution received by an individual is redeposited into a qualified IRA for the benefit of that individual within 60 days of the distribution. This redeposit is known as a “rollover contribution.”

However, rollover treatment is not available to a non-spouse beneficiary in the case of an inherited IRA. Any distribution from an inherited IRA is taxable if the distribution is paid to a non-spouse beneficiary. Under the Code, an IRA is treated as inherited if the individual for whose benefit the account or annuity is maintained acquired that account by reason of the death of another individual who was not his or her spouse.

In Mrs. Beech’s case, the $35,358 was paid from her mother’s IRA to Mrs. Beech as the named beneficiary. She then redeposited the funds into an inherited IRA account. Since the IRA account belonged to Mrs. Beech’s mother, it was deemed to be an inherited IRA for the benefit of Mrs. Beech and, therefore, rollover treatment was not available for the distribution.  The entire $35,358 distribution was taxable income to Mrs. Beech!

Mrs. Beech would not have been treated as having received a taxable distribution from an IRA, however, if the funds in the IRA were transferred directly from Citi to American Funds without her ever gaining control or use of the funds. This is commonly known as a “trustee-to-trustee transfer.”
A trustee-to-trustee transfer is the only way for the beneficiary of an inherited IRA to make a nontaxable transfer of funds in the IRA account.

What makes a case like Mrs. Beech’s so difficult is that there is no way in the Code for the mistake to be corrected. Once Citi issued the check, it became taxable income. Neither the tax court nor the Internal Revenue Service could grant Mrs. Beech any relief from the income taxes and penalties incurred for her mistake.

The lesson from Mrs. Beech’s mistake is that in every case where a non-spouse is the beneficiary of an IRA, a transfer should only be made via the trustee-to-trustee method to avoid income taxation of the transferred amount.

The case of Beech v. Commissioner of Internal Revenue can be read here.

IRA rules and regulations are extremely complex and costly mistakes can be easily made.  If you need help navigating the IRA rules and regulations, call me, I can help.

Year-End IRA Housekeeping

The end of the year is fast approaching, and with it several important deadlines for IRA account owners and beneficiaries. In my experience helping clients address year-end IRA matters, the following are the most problematic areas:

Required Minimum Distribution (RMD) Deadline:

December 31 is the deadline for taking RMDs from an IRA for an account owner who reached age 70½ before 2018. The RMD has to be withdrawn from the account before January 1. The account owner cannot merely request a distribution before year end. RMDs not withdrawn from the account are assessed a 50% penalty, in addition to regular income taxes. If you haven’t taken all of your RMDs yet for 2018, make sure you take them in time to avoid the 50% penalty.

RMDs for a Deceased IRA Owner:

If an IRA owner died in 2018 before all of his RMDs were taken for the year, the remaining RMDs must be paid to the account beneficiary before the end of 2018. This is not a pro-rated amount. The RMDs are calculated for the full year. This can often times be overlooked especially if the IRA owner died late in the calendar year. Undistributed RMDs from a decedent’s IRA are subject to the 50% penalty on missed distributions.

RMDs for Inherited Traditional IRAs or Roth IRAs:

A non-spouse beneficiary of an inherited IRA can elect to take annual RMDs over their remaining life expectancy. If they do, the first RMD distribution must be taken before December 31 of the year following the year of the IRA owner’s death, and then each year thereafter over their remaining life expectancy. If you are the beneficiary of an inherited IRA, you too must take an RMD before the end of 2018 if the account owner died in 2017 or earlier. Undistributed RMDs from an inherited IRA are also subject to the 50% penalty on missed distributions. This applies to the beneficiaries of Roth IRA accounts too. While a Roth IRA owner does not have to take distributions from a Roth IRA at any time, beneficiaries are subject to the same RMD rules as beneficiaries of traditional IRAs. So don’t get caught thinking you don’t have to take distributions from an inherited Roth IRA. You do!

Splitting Inherited Traditional IRAs or Roth IRAs:

If there are multiple beneficiaries of a traditional or Roth IRA account whose owner died in 2017, the account must be split into separate accounts for each beneficiary before December 31 of 2018. This is to ensure that each beneficiary gets to use his own life expectancy in determining annual RMDs for his share of the account. If the account is not split and the RMD taken before the end of 2018, the life expectancy of the oldest beneficiary will be used to calculate the annual RMDs for all of the beneficiaries. This results in younger beneficiaries paying more income taxes each year on their distribution from the account.

No “Still Working” Exception for Older and Still Working IRA Owners:

There is no “still working” exception to the RMD rules for traditional IRA owners who are still employed beyond age 70½. While an owner of a 401(k) account may work beyond age 70½ and delay RMDs from his 401(k) account while his employment continues, that same employee must take RMDs from his traditional IRA if he reached age 70½ before 2018. This includes owners of SEP-IRAs and SIMPLE IRAs.

While not exhaustive, these are the most common areas where mistakes are made.  Even if you’ve taken your RMDs for 2018, it won’t hurt to go back and review your situation and your math to avoid any negative consequences from unrealized errors.

The rules governing required distributions from IRAs are extremely complex.  The penalties for making a mistake can be severe.  If you need help navigating the year-end complexities of managing IRA distributions, please contact me.  I can help.