Recent Major Changes in Retirement Account Laws that Affect You

April 6th, 2021 by admin

Retirement planning for years has included tax-deferred plans that allow a person to put money into a plan and avoid paying the income-tax rate to which the money would otherwise be subject in the year earned (35%, for example). Your personal plan contribution would be deducted from your income subject to tax in the amount allowed that year ($7,000 a person, for example.) But the investment grows tax free over the years. When you are required to start taking your distributions in your 70s, you pay the taxes at your now-retired income-tax level — which is nearly always much lower. (18% bracket, for example.) Additionally, an amendment to the law allowed children who had inherited monies from a parent’s plan to take the money out over their lifetimes, too.

As one can imagine, the removal of billions of dollars otherwise subject to federal income tax for generations had a significant impact on the federal deficit. A dollar earned and contributed in 1975 to the tax-deferred plan may not be fully subject to any federal income tax until 2075, for example (assuming the parent started making contributions in their 20’s.)

The so-called SECURE Act was passed in 2019 to make those inherited tax-deferred retirement plans (for deaths of original account owners in 2020 or later) fully subject to federal income taxes in a much shorter period.

Why is it called the SECURE Act?

SECURE is an acronym which means the “Setting Every Community Up for Retirement Enhancement.” (Governmental bodies are fond of acronyms.)

What are the major changes?

A parent’s inherited retirement account now must be taken out much sooner and be subject to the appropriate income taxes.

In summary, unless a beneficiary is an eligible beneficiary, they must receive the retirement account benefits within 10 years of the date of death of the account owner, unless you are in one of these categories:

• Spouse
• Beneficiary is not more than 10 years younger than the account owner (e.g., sibling, cousin, friend)
• Minor child of account owner until child reaches age of majority (18 in N.C. and in most states)
• Chronically ill beneficiary
• Disabled beneficiary

Other major changes

• The age at which one must begin the minimum required distribution (MRD) is now 72 (not 70½) on your personal retirement account.
• There is no longer a maximum age for contributions to IRA’s. If you have contributed an income-tax deductible $7,000 each year, you may continue to do that. (Or, to your Roth IRA, which is not tax-deductible.)

What should you do now?

• Review your beneficiary selections for your present and inherited retirement plans and discuss your circumstances with your CPA/accountant and investment advisers, who may suggest other options, such as a Roth IRA. (As an aside, you may find that your beneficiary selections are different from what you remembered.)
• Consider giving your Required (at 72) Minimum Distribution (MRD) to charities not subject to federal income taxes. Since the standard income-tax deduction is much larger now, you may find it is better for you, tax-wise, not to itemize your deductions, including charitable contributions. (But either way, please keep making them, as your charities of choice, especially your body of faith, sure need your financial support!)
• If your estate planning documents (wills, trusts) provide for the inheritance of your retirement plan balances, consult with your attorney to see what, if any, adjustments should be made. (You can pay out all the assets in the inherited plan the 10th year, for example, if your documents provide that flexibility for the inheriting plan recipients.)

Remember: An informed choice is a smart choice.

Tags: Law

Posted in: WS Journal Articles