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I hope the transition to the year 2020 brought joy and a fresh outlook.  If you follow the news, you also know that it brought changes to the tax laws that may impact your life and estate planning.

As part of budget legislation, the U.S. House and Senate passed the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019, and President Trump signed it on December 20, 2019.  It became effective on January 1, 2020, and may change the way you view your retirement.

The Act made some changes to how businesses set up retirement plans for employees, and this article does not address those changes.  Importantly, the Act made changes in how retirement accounts (401k, IRA, 403b, Thrift Savings, etc.) will be distributed to you and your beneficiaries.

Before and after the SECURE Act, distributions from tax-deferred retirement accounts (generally, all retirement accounts except Roth IRA’s), are taxed to the recipient of the distribution as income to that person.  Assuming that you are the owner of a retirement account, distributions will be made to you as long as you are living. You will pay income tax on those distributions at your income tax margin. This means, if your total annual income places you in the 22% tax bracket, you will pay 22% of the distribution as income tax.

In 2019 and before, all owners were required to begin taking distributions at age 70 ½.  This is called the “required minimum distribution” or RMD and is calculated according to rules published by the IRS.  Your financial institution, accountant, or financial planner should be able to tell you what the RMD is or will be for your account(s).  

The SECURE Act changed the age at which RMD’s begin to age 72.  This means that people who did not reach the age of 70 ½ by December 31, 2019, must begin taking distributions from retirement accounts at age 72.  

I find that some of my clients do not know they are required to take RMD’s from their accounts.  If you are over the age of 70 ½ and do not know if you are receiving RMD’s from your retirement account(s), I recommend that you ask your accountant about this as you begin preparing your 2019 tax return.  There can be penalties for failing to take the required distributions.

For those who have not yet reached age 70 ½, you can allow your retirement accounts to continue growing without taxes or distributions until you reach age 72.  When you reach age 72, you should check with your financial institution, accountant, or financial planner to make sure you begin taking RMD’s.

The SECURE Act also made important changes to how beneficiaries will receive distributions from your retirement accounts after your death.  These changes are significant enough that you may want to reconsider the beneficiaries named on your accounts!

Beginning in 2020, only a spouse beneficiary can “stretch” distributions from an inherited IRA across his or her lifetime.  This means you can name your spouse as beneficiary on your IRA, and he or she can spread out the distributions from that account across his or her lifetime. 

Beginning in 2020, if you name someone other than your spouse as a beneficiary, that person must withdraw the entire principal of the IRA within 10 years of your death.  Depending on the amount of money in the IRA, those distributions could add large amounts of taxable income to your beneficiary.

These changes may change the focus of your life planning.  For example, some clients with large IRA balances preferred to leave those accounts to young people, such as grandchildren, great nieces and nephews, etc., so that the principal can grow over a long period of time and the tax on distributions will be low.  With the SECURE Act, large IRA principals cannot be stretched over the lifetime of a non-spouse beneficiary; they must be withdrawn in no more than 10 years.

Remember that tax exempt charities do not pay income tax.  If you name a tax exempt charity as a beneficiary of your IRA, it will receive the entire principal without paying income tax.  The SECURE Act did not change this provision.

Part of the life planning consultation I conduct with my clients includes who to name as beneficiaries on retirement accounts.  We carefully consider how to balance inheritance from retirement accounts and non-retirement accounts in order to provide the maximum inheritance for each beneficiary.  With the new SECURE Act, this may be a good time to review your life and estate plan to make sure it still meets your goals.

If you would like to review your will, trust, beneficiaries, or other aspects of your life and estate plan, call 727-826-0923 now to schedule a consultation.


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