Have you head about the new Secure Act of 2019? It was passed late last year and impacts IRA’s quite a bit.
The elimination of the STRETCH IRA – impacts non-spouse beneficiaries of IRA’s.
The rule requires inherited IRA accounts to be emptied by the end of the tenth year following the year of death. There are no annual Required Minimum Distributions (RMDs). Instead, the only RMD on an inherited IRA is the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules would remain in place.
There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over life expectancy. These include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than ten years younger than the IRA owner.
Not having to take a RMD from an inherited IRA in any one year gives the beneficiary terrific flexibility in exchange for not being able to stretch distributions out over their life expectancy. For example, if you were to inherit a sizable IRA at age 60, you might not want to take a distribution if you are still working. You can delay until you retire or for up to year ten.
If you retire at 67, you may want to start taking it then, possibly allowing you to defer taking a Social Security benefit for a few years. This allows the Social Security benefit to grow by 8% each year your defer it until age 70.
Other changes from the Secure Act:
Age Limit Eliminated for Traditional IRA Contributions
Beginning in 2020, the new law eliminates the age limit for traditional IRA contributions (formerly 70 ½). Now, those who are still working can continue to contribute to a traditional IRA, regardless of their age.
RMD Age Raised to 72
The SECURE Act also raises the age for beginning RMDs to 72 for all retirement accounts subject to RMDs. IRA owners reaching age 70 ½ in 2020 catch a break and will not have to take their first RMD in 2020 now that the RMD deadline has been extended to age 72.
New Exception to the 10% Penalty for Birth or Adoption
The SECURE Act adds a new 10% penalty exception for birth or adoption, but the distribution is still subject to tax. It is limited to $5,000 over a lifetime. The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).
Contact me if you have questions about how this might impact your planning.
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