Investor Column | Congress approves biggest changes to retirement accounts in more than a decade
Hey, while everyone was fighting about impeaching President Donald Trump, practically no one was talking about all the weird stuff happening to IRAs, or individual retirement accounts. SECURE stands for “Setting Every Community Up Retirement Enhancement.” Just before the holidays and the impeachment vote in the House, SECURE was attached to the spending bill for 2020. President Trump signed this into law on Dec. 20. So, all this talk about partisanship preventing Washington from getting anything done is bogus when it comes to IRAs. This was the most significant changes affecting retirement rules and our retirement system since 2009.
For those of you binge-watching CNN and Fox, Christmas shopping, and doing shots on Old Main Street last December, here’s all the good stuff, and it’s wild. Consider:
New Age 72 RMD – I’ve been doing tax returns and financial advising practically forever. Most of my clients with IRAs were required to start drawing from IRAs by April 1 of the year after they turn age 70½. Now for people, born on or after July 1, 1949, with IRAs who turn 70½ in 2020 or – later – you can start taking RMDs at age, get this, 72! Those of you are already taking IRA distributions, you’re not grandfathered in.
Contribute to IRAS After Age 70 ½ - My father worked until he was age 84 as a pharmacist in Bradenton. Under the old rules, you could no longer get a tax deduction for taking a traditional IRA if you’re age 70½ or more past. Traditional IRAs usually provide immediate tax savings because they are subtracted from gross income. Now working seniors, like my father, can contribute to traditional IRAs. Funny, but some seniors will take RMDs and contribute to IRAs.
Stretch IRA is Gone for Most Beneficiaries – Before 2020, individuals could create inherited IRAs and extend IRAs after the owner’s death over her lifetime. Consider a grandchild who inherits an IRA stretching it over, taking RMDs, over 70 years. The tax deferral was fabulous. Now SECURE terminates stretch IRAs. Anyone inheriting IRAs, except spouses, only has ten years to have all the money in the inherited IRA paid out. If you already have an inherited IRA under the prior rules, you’re lucky, and you can take your required minimum distributions out over your life expectancy. There are also exceptions for minor children, up to the age of majority, disabled individuals, and individuals who are chronically ill. What’s interesting is that you have ten years to pull the money out, but you’re not required to pull the money out each year. You could take out the money 100% in year ten. In case you’re wondering Roth IRAS are also subject to the new ten-year rules
New Exception for 10% IRA Penalty: Traditional IRAs incur regular income tax and a painful ten percent premature penalty assessed for taking money out before age 59½. Get yourself in a financial bind, and a loan shark likely charges less usury. Exceptions for paying medical expenses, first time home, and others allow you to avoid paying the ten percent penalty. Now for 2020, you can beat the ten percent penalty should you use the funds for birth or for adopting a child. Claim this exception with one year of your child’s birth or new adoption.
Jim Germer is a Bradenton CPA and financial adviser at 100 Third Ave. W., Suite 130. Call (941) 746-5600 or email jim.germer@ceterafs.com. Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency) member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. Cetera entities are under separate ownership from any other named entity.
