In our last newsletter we discussed proposed retirement reform that had bi-partisan support. Although we, along with the rest of the planning community, anticipated some significant change to IRAs and RMDs for non-spouse beneficiaries, we didn’t have an actual law to work with.
As of December 20, 2019, we do have a law to work with. Although we’ve only had a little over three weeks (as of this writing) to decipher and plan with the new law, we have developed some formal comments and opinions. If you would like to read our Whitepaper on the SECURE Act, please give us a call or contact Casey H. Pisano, CFP, CPISANO@THEBIONDOGROUP.COM
The most significant item to come out of this law is what is being called the “ten-year rule.” This new rule states that, if you’re not an Eligible Designated Beneficiary of an IRA, then you must distribute the IRA you inherited within 10 years following the year of inheritance.
Why is this significant?
Previously, most people who inherited an IRA could “stretch” the required distributions over their lifetime. This generally resulted in incremental increases in income, even with large IRAs. These small distributions were less likely to cause a significant amount of extra tax for the beneficiary. This dynamic is now reserved only for “Eligible Designated Beneficiaries” or EDBs for short. EDBs include spouses, the chronically ill or disabled, minor children (only until the age of majority) and those who are not more than 10 years younger than the decedent.
If you are not an “EDB,” you are going to have to pull all of the money out of the IRA within 10 years. You can imagine how this rule could cause a little bit of a surprise come tax time. Imagine inheriting a $1M dollar IRA and all of a sudden having to add six figures of income onto your tax return every year. Or, not doing anything for nine years and having to include over $1M dollars onto your income!
Clearly, this is going to potentially cause many people to be paying more in taxes and receiving less of their inheritance. Revenue needs to be raised from somewhere, this time around it seems the crosshairs are dialed in rather tightly to the beneficiaries of IRAs.
For this reason, among others, it is now more important than ever to: Review who the beneficiaries of your IRA are and review what your retirement income distribution plans are. This is the first step in order to make sure you’re taking the proper action in navigating these new retirement rules. If you have non-spouse primary beneficiaries or a trust named as beneficiary on your IRA, please give us a call as soon as possible. In these particular situations there is no time to waste.
There have already been a myriad of planning techniques and strategies developed to navigate the new ten-year rule. We invite those who think they may be adversely impacted by this rule to reach out and discuss it with us.
There are many other changes made by the SECURE Act. They include:
• No restriction on making IRA contributions past age 70.5 (so long as there is still earned income)
• The age for beginning RMDs will now be 72 instead of 70.5 (for those who turn 70.5 in 2020 or later)
• A new wrinkle in how Qualified Charitable Distributions can be managed
• The reversion to pre- “Tax Cuts Jobs Act” kiddie tax rates
• Distributions from 529 plans can be used (up to 10k lifetime, per person) to pay down student loan debt
• An exception to the 10% early distribution penalty for childbirth and adoption expenses ($5,000 per person, per child)
• Several changes relating to “small” employer and other qualified retirement plans
If you would like to discuss any changes brought about by the SECURE Act, please give us a call and arrange a time to discuss your specific questions.
Casey H. Pisano, CFP®, AIF®