Most people watching the news would think that all that has happened at our federal government level recently dealt only with politics and impeachment. However, a very significant law was recently passed with both Democrat and Republican support that will have huge impacts on retirement for most of us and for inheriting retirement savings for many more of us.
Retirement plans, like IRAs, are the most frequently used tool for retirement, other than social security, in America. Of course, sometimes, we overfund our IRAs. In other words, we save more than we spend before we die.
Until the end of 2019, the law has been that if a non-spouse (like a retiree’s kids or grandkids) “inherited” an IRA upon the IRA owner’s death, that non-spouse could “stretch out” receipt of the money from that deceased IRA owner over the lifetime of the person receiving the IRA. Often, the stretched-out payments could be received in small amounts over the long lifetime of the non-spouse, which would significantly save on the non-spouse’s income taxes.
However, the new SECURE (Setting Every Community Up for Retirement Enhancement) Act that passed last week provides that the maximum duration for non-spouses to “stretch out” inherited IRA payments is 10 years. After 10 years, whatever is left in the IRA must be retrieved by the non-spouse, and the non-spouse must pay tax on that outstanding amount. This change is expected to increase federal tax revenue by $15.7 billion.
Notably, this change only affects certain retirement accounts of people who die on or after Jan. 1, 2020. The law applies to 401K accounts and Roth IRAs as well as traditional IRAs.
The SECURE Act also introduces a second major change in retirement law specifically dealing with required minimum distributions affecting people who reach a certain age. Most of us recognize that we are required to retrieve a certain minimum amount from our IRAs beginning once we turn age 70 1/2. That annual amount of required minimum distribution (RMD) has been set at 3.65% annually.
The SECURE Act changes the trigger age for RMDs to age 72 for everyone born on or after July 1, 1949. This change is intended to allow for retirement accounts to “last longer” as people live longer. Of course, with retirement accounts being able to retain more value longer, the risk of a person dying with excess money increases. The SECURE Act attempts to offset that risk with the shortening of the “stretch” provisions, as explained above.
Very importantly, the change in the RMD trigger age did not accompany a change in the ability to make tax-free charitable distributions directly from IRAs beginning at age 70 1/2. As discussed in a previous column, tax-free charitable contributions can be made even if a retiree takes the standard tax deduction.
In other words, a person may give charitably directly from his or her IRA without paying tax on the amount given even if taking the standard deduction. And, this is still able to be undertaken beginning at age 70 1/2.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.