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Tag: Roth

Important IRA and Roth Changes Under the SECURE Act

by: P. Lewis Robinson, CPA | Managing Director, Senior Wealth Advisor                                                                                                                                              CapSouth Wealth Management, McDonough, GA Office                                                                                                                                                                                                1.8.2020

 

Congress has passed the year-end Spending Package that includes the SECURE Act that became effective January 1, 2020. President Trump signed the bill on Friday, December 20, 2019. With the passing of this bill there are major changes to the rules for IRAs and Roth IRAs. Although there were also changes in the 401(k) world, this article will focus only on the changes to IRAs and Roth IRAs.

 

The following is a summary of the major changes to IRAs and Roth IRAs:

 

  1. Due to people working longer, Congress has pushed out when required minimum distributions (RMDs) begin. For anyone who has not reached age 70.5 by the end of 2019, the new required beginning date will be 72 for RMDs. There is an exception to this rule if you are not a 5% owner in the company and continue to work; in this case you can push out your RMDs for your current employer’s retirement plan until the year after you retire.

 

  1. We have many clients who take advantage of Qualified Charitable Distributions from their IRAs at age 70 ½. This rule allows a taxpayer who is age 70 ½ years to make a distribution to a qualified charitable organization that will not be subject to income taxes. There has not been any change in this provision. At age 70 ½, a taxpayer can still make Qualified Charitable Donations. If you have a question as to how this could reduce your income taxes, call you financial advisor at CapSouth Wealth Management.

 

  1. Under the old rules, there was an age limitation to being able to make deductible Traditional IRA contributions. Under the new bill, there is no age limit for making IRA contributions as long as you or your spouse have earned income. If you are a participant in a company retirement plan, you may not be able to make an IRA contribution or may be subject to contribution limits. Discuss these limitations with your tax advisor.

 

  1. One of the more appealing Roth IRA rules is the lack of an age limit on contributions. While traditional IRA contributions were barred for individuals older than 70 ½ before January 1, 2020, you could and still can be any age and contribute to a Roth IRA if you or your spouse has earned income. However, there are limitations that you should be aware of. Discuss these limitations with your tax advisor.

 

  1. The new law allows taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA (or Roth IRA) contribution.

 

  1. What has been called the Stretch IRA has been limited. Under the old law, beneficiaries, other than a spouse, could take Inherited IRA distributions over their lifetime. Now, Inherited IRAs and Roth IRAs will have to be distributed to the beneficiaries, other than an eligible designated beneficiary (EDB), within 10 years beginning the year of the death of the account holder. In addition to the surviving spouse, there are four other categories of EDBs that are discussed in the next point.

 

  1. The following is a list of the eligible designated beneficiaries (EDB) that are entitled to a modified version of the life expectancy payout method:

 

  1. Minor child (but not grandchild) of the participant. The life expectancy payout applies to a “Child of the employee who has not reached majority.” Upon reaching the age of majority, the ten-year rule becomes effective.
    1. A child may be treated as not reaching the age of majority if the child has not completed a specified course of education and is under the age of 26.
    2. A child who is disabled within the meaning of the IRS regulations when the child reaches the age of majority may be treated as having not reached the age of majority so long as the child continues to be disabled.
  2. Disabled beneficiary. The life expectancy payout applies to a designated beneficiary who is disabled within the meaning of the IRS regulations. Upon their death, the 10-year payout rules become effective.
  3. Chronically ill individual. The life expectancy payout applies to a designated beneficiary who is chronically ill within meaning of the IRS regulations. Upon their death, the 10-year payout rules become effective.
  4. Less than 10 years younger beneficiary. The life expectancy payout applies to an individual who is not 10 years younger than the participant. Upon their death, the 10-year payout rules become effective.

 

  1. There will be tax planning opportunities for those who inherit IRAs. Unlike with the old rule, there is no required amount to be paid out each year of the 10 year pay out period. The beneficiaries could take larger distributions in years where the beneficiaries’ tax bracket is low or lesser amounts when their tax bracket is high.

 

 

 

  1. The effect of limiting the stretch of the IRAs and Roth IRAs is as follows:

 

  1. The income taxes payable by the beneficiaries would probably be higher since they can not spread the income taxes over a longer period.
  2. The deferral of the income taxes would be much shorter.
  3. Shorter period of tax-free growth of Roth IRAs.

 

  1. In my opinion, the change in the stretch IRA or Roth IRA makes life insurance a more tax efficient way to leave a legacy to your heirs.

 

  1. Every person who has named a trust as their IRA beneficiary will need to review those plans and likely look for alternative planning solutions.

 

  1. The new Act would likely cause problems for so-called “conduit” trusts. Conduit trusts have been used by IRA owners to ensure that the bulk of the inherited IRA is preserved for the beneficiary over the long haul. Any required minimum distributions (RMDs) that are distributed from the IRA to the conduit trust are then passed by the trust to the beneficiary and taxed in the year of distribution. The beneficiary may or may not have the ability to withdraw amounts in addition to the RMD.

 

  1. Under the new Act, the entire account would be distributed to the beneficiary. Going forward, IRA owners should consider using accumulation trusts instead. Accumulation trusts permit distributions from an IRA, including RMDs, to be preserved for the beneficiary inside the trust. So, although the new Act would require the entire IRA to be distributed to the trust within ten years, the assets could be held in trust for the beneficiary for as long as the terms of the trust dictate. However, an accumulation of trust would not prevent income tax from being assessed as distributions are made from the IRA to the trust.

 

  1. A major planning objective for the beneficiaries of trusts is to minimize the annual taxable income. The maximum Federal income tax rate of 37% applies to taxable income of the trust in excess of $12,951. The 37% bracket does not start for a couple until their taxable income is in excess of $622,050.

 

  1. Spouses still have the option to roll an Inherited IRA from their spouse into their own IRA or Roth IRA. They could treat the IRA or Roth IRA as an Inherited IRA or Roth IRA. In some cases, it could be an advantage for the spouse to elect to treat the IRA or Roth IRA as an Inherited IRA or Roth IRA.

 

  1. There is a new exception for the 10% penalty for distributions up to $5,000 for birth or adoption made before a taxpayer is age 59 ½ years of age. The distribution is subject to income taxes. The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).

 

  1. For parents and others with 529 education savings accounts, the legislation allows tax-free withdrawals from IRAs of as much as $10,000 for repayments of some student loans. The distributions for loan repayment amounts would be subject to income taxes.

 

The bottom line is that if you have retirement accounts, you should strongly consider working with a financial advisor who knows the new rules. CapSouth Wealth Management has been very pro-active with planning regarding IRAs and Roth IRAs. With this new law, there are even more planning opportunities.

 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. The information in this article has been provided by sources deemed to be reliable. However, CapSouth Wealth Management does not guarantee the accuracy or completeness of the information. This material has been prepared by P. Lewis Robinson, CPA for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

Unknown Tax Liability on Your Retirement Accounts

Unknown Tax Liability on Your Retirement Accounts

By J. Scott Fain

July, 2018

You’ve worked most of your life to accumulate assets in various forms, likely to some extent in Individual Retirement Accounts (IRA’s). The government has allowed you to defer income into these accounts and to delay paying taxes on them until a later date…the date the funds are withdrawn to fund your retirement or beginning at age 70½ when your required minimum distributions (RMDs) begin.

The upside is you have been able to use those tax dollars to generate growth for yourself and to defer the withdrawals and payment of taxes until you are potentially in a lower tax bracket. On the other hand, this creates some unknowns: what tax rates will be at the time of the withdrawals and what your tax bracket will be…so essentially there is an unknown tax liability on your account.

Some clients have substantial assets and may never need to access the funds other than as directed for RMDs. Other clients rely on these funds for retirement and often do not realize ahead of time the impact of having to withdraw not only the amount of funds they need for living expenses, but also the funds to pay the taxes on those withdrawals.

Further, clients often do not consider that the tax burden on their retirement accounts follows the accounts to the beneficiary and will be paid at the respective beneficiary’s tax bracket and rate.

What are some planning opportunities regarding these taxes on your retirement accounts?

Roth Conversions – Many times parents are in a lower tax bracket during retirement than that of their children.  Further, Georgia provides a Retirement Income Exclusion for taxpayers beginning at age 62, so Georgia retirees often do not pay state income taxes.  Parents with excess assets should consider Roth conversions to allow for payment of taxes now at their tax rates and to provide their children with Roth IRAs growing tax free.

Qualified Charitable Distributions (QCDs) – Many people write checks directly to charities, not knowing there are more efficient methods available.  One of these methods is through Qualified Charitable Distributions (QCDs).  QCDs allow you to make distributions from your IRA(s) directly to your charity of choice, never having to report the funds as taxable income to you.  In many cases, this provides a greater benefit to you than writing a check for a donation directly to the charity and then taking a deduction on your taxes.  By not counting the IRA distribution as income, you may reduce the amount of your Social Security benefits that are taxable, and you may reduce your Medicare premium, as both of these amounts are based on your amount of income.  As a bonus, QCDs count towards satisfying your Required Minimum Distributions (RMDs) which begin at age 70½.

You must have attained age 70½ to be eligible, and QCDs are limited to $100,000 per taxpayer, per year. The distributions can be done on demand or may be setup as recurring on a monthly or quarterly basis.  The distributions generally come in the form of a check made payable to the charity and are mailed to the client’s home address.  It is very important to coordinate with your advisor and your tax preparer to make sure these distributions are reported correctly.

Life Insurance – Another way to address taxes on retirement accounts is through life insurance.  Utilizing a permanent life insurance policy, such as Guaranteed Universal Life (GUL), on the individual or on a joint-life basis allows one to leverage a portion of his or her assets to provide a death benefit to pay the taxes on the account.  It is important to note that the death benefit comes in tax-free.  By utilizing a GUL policy, which is designed to provide the largest death benefit for the lowest premium, on a guaranteed basis, we can forecast the internal rate of return on the policy for a given date of death – i.e. the rate that you would have had to earn on the invested premium dollars to end with the amount of the death benefit on that date.  Assuming good health and insurability, these are generally favorable rates of return. (See also my article on Life Insurance as an Asset Class).  This option can be a good utilization of excess funds from RMDs as well.

Estate Planning – A simple, yet often overlooked, planning opportunity involves charitable bequests.  When selecting assets to leave to various individuals or charities, consider leaving your retirement accounts to charities and other assets to your children or other individuals.  Again, the tax burden on the retirement accounts follows them – whether to your children or to other beneficiaries.  Most other assets will receive a step-up in basis at your death to fair market value, thus they will have no tax burden.  Since non-profit 501(c)(3) organizations do not pay taxes, it is more efficient to leave them your IRAs and to leave your children your investment accounts, real estate, life insurance, etc.  Remember: Beneficiary designations supersede your Last Will & Testament.  Be sure to review your beneficiary designations on your IRAs, life insurance policies, and 401k accounts, and to review any Transfer on Death (TOD) designations, etc. in context of your desired estate plan.

Utilize the Roth Option – As an alternative to deferring taxes into retirement, the Roth IRA allows individuals to contribute funds into the Roth IRA account on an after-tax basis, meaning that you pay the taxes on the income now at your current tax bracket and rate and then defer use of the funds until retirement (after 59½ ).  Under this option, the funds grow tax free going forward until withdrawn.  If necessary, you can withdraw your contributions (not the growth) prior to age 59½ without penalty.  Many 401k plans now offer a Roth option for deferrals.

In summary, there are several planning opportunities that exist and should be considered regarding your retirement accounts and the unknown amount of taxes that will be due and payable by someone at some time.  Contact CapSouth for more information on these concepts and how they might apply to your particular situation.

800-929-1001

CapSouthWM.com

***This article is not intended as specific advice or recommendation. All decisions should be reviewed and considered in the context of your individual situation.  Please contact us for more information on how this information may be utilized under your circumstances.  CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisor.  CapSouth does not provide tax or legal advice.  Please consult your tax or legal advisor before making decisions that may have tax or legal consequences.***

 

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