What’s the deal with IRA changes?

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2019 closed out with a flurry of new laws being signed into existence. Many people were not paying attention as the excitement of Christmas approached and our elected officials largely led us to belief everything was being done to approve a spending bill and keep our government running. At 2,300 plus pages I doubt seriously that many of our elected officials looked at it, much less read the legislation in the 24 hours they had before voting. Part of the year end flurry included legislation called the Secure Act (Setting Every Community Up for Retirement Enhancement). This Act had several changes for IRAs (Individual Retirement Accounts) that should cause owners of these accounts to review estate plans and/or generally be aware of the changes.

Required Minimum Distribution

The Required Minimum Distribution (RMD) age moved up from 70 ½ to 72. In 2020 or later you will not be forced to withdraw money from your IRA until after your 72nd birthday. You can still make a Qualified Charitable Distribution (QCD) from your IRA at 70 ½ since the law did not change the age for a QCD (of course, doing the QCD before age 72 will not count toward a required minimum distribution since those don’t start until age 72 going forward).

IRA contributions are no longer prohibited for those over age 70 ½. This is a great value-added change since many people are working longer and the changes in the law allow contributions as long as you have earned income. You can continue to save for your future as you see fit. Roth IRAs have never had an age restriction so the change applies to traditional IRAs.

“Stretch” IRAs

One of the most meaningful changes to IRAs was the elimination of the “Stretch” IRA for some beneficiaries. Historically when you inherit an IRA, as a non-spouse beneficiary, you could stretch distributions over your life expectancy as the beneficiary. For most beneficiaries who inherit an IRA or define contribution plan in 2020 and beyond, the beneficiary will have to withdraw the IRA account fully within 10 years. This also means that the beneficiary will fully pay income taxes on the withdraws. The law gives flexibility to the beneficiary on when and how they make withdraws but they must fully take the account balance from the inherited IRA by the end of the 10th year following the original IRA owner’s death. The Secure Act did not abolish the “Stretch” IRA for Eligible Designated Beneficiaries or EDBs but that is a relatively small group of people. EDBs include the following:

  • Surviving spouses
  • Minor children, up to majority age (this does not apply to grandchildren)
  • Disabled individuals (as defined under strict IRS rules)
  • Chronically ill individuals
  • Individuals not more than 10 years younger than the IRS owner (think siblings around the same age)

Planning Alternative

No one likes to pay more tax than they need. People typically do not want to cause tax for their heirs either. As you review your estate plans consider the assets you are leaving to your heirs and the assets you are leaving to your church or favorite Moravian entity. IRAs for example, left directly to charity, cause a tax by-pass because charities do not have to pay tax on those assets. Retirement assets left directly to individuals cause the individuals to pay taxes upon withdraw of funds. For IRAs and Defined Contribution Plans, that withdraw for most beneficiaries is now on a faster speed allowing more taxes paid within a 10-year period (see above paragraph). If you have life insurance, make sure your heirs are the beneficiaries there because life insurance usually passes with little to no tax impact to an individual taxpayer.

Another idea would be to leave your IRA assets to a charitable remainder trust. The trust would create an income stream to your heirs for their lifetimes, giving them the ability to spread any tax impact. The balance in the trust, when your heirs enter the more immediate presence of our Savior, would pass to your church or favorite Moravian entity.

If you have questions about these or any strategy please call Chris Spaugh at 888-722-7923 or email Chris at cspaugh@nullmmfa.info.

Chris Spaugh

About the Author:

Chris joined the Moravian Ministries Foundation on June 1, 2017 as President. A lifelong resident of North Carolina, Chris spent 22 years in increasing positions of responsibility at Wells Fargo Bank NA, and its predecessor, Wachovia Bank. He is a passionate leader of relationship-driven philanthropy in the areas of charitable giving and financial solutions. Chris has vast experience with visionary leadership, staff management, nonprofit governance, financial management/oversight, client service, partnership-building and strategic planning.
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