February 2020 Newsletter to ClientsSubmitted by Moneywatch Advisors on February 6th, 2020
Enjoy this month’s edition that features a note about tax forms from TD Ameritrade plus a review of significant changes to retirement plans made by Congress.
2019 Tax Forms: If you haven’t already, you should soon receive the applicable tax forms regarding your TD Ameritrade account(s). TD Ameritrade will notify you via email when they are available online and/or mail them to you.
Congress Made Changes To Your Retirement Plans:
Congress made some significant changes to retirement plans near the end of the year as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Please come see us if you would like to discuss the effects of the Act on you and your family. Here are the highlights:
Required Minimum Distributions (RMDs):
When we pay into our IRAs, 401(k)s, and 403(b)s, we usually make those contributions on a pre-tax basis. The federal government wants that income tax eventually, though, and ensures it gets it by imposing RMDs on people. If you turned the round age of 70 1/2 prior to December 31, 2019 then you have to take RMDs each year based on a formula. The SECURE Act, however, increases the age one has to take RMDs to 72. That’s good news as it gives your investments more time to grow before you have to start depleting them.
You Must Withdraw Assets from Inherited IRAs, 401(k)s and 403(b)s Within 10 Years:
If you plan on either bequeathing a retirement plan to a child or inheriting a retirement plan from a parent, this change is significant and may require some reevaluation of your estate planning strategies.
Before the Act, if you inherited a retirement plan from someone who was already taking RMDs, you too would have to take RMDs, but you could stretch those over your lifetime. For instance, if you inherited your 75-year old Mom’s IRA, you would take RMDs based on your life expectancy. Under the Act, that provision goes away and you must withdraw the entire amount within a decade and pay the required income tax each year. So, under the old way, taking a $1 Million IRA over, say, 25 years would only result in $40,000 of extra taxable income each year. For someone in the 22% tax bracket that would mean about $8800 in extra income tax each year.
Under the new Act, that $1 Million inherited IRA means an RMD of $100,000 extra taxable income each year for 10 years. All of a sudden, your extra income tax becomes $22,000 – an additional $13,200 in taxable income over the old way each and every year for 10 years. Clearly, it’s quite probable that more of your inheritance will go to taxes than before, meaning less inheritance to you.
Incidentally, surviving spouses are exempt from the law change so a wife, for instance, can still stretch RMDs inherited from her husband over her own lifetime.
Contributions to Individual Retirement Accounts (IRAs):
Before the SECURE Act, one could only contribute to an IRA, and receive the tax deduction, before the age of 70 ½. Now, as long as you or your spouse have earned income, you may contribute to your IRA(s) at any age. The maximum, tax-deductible contribution you may make in 2020 is $7,000 per person, assuming you’re 50 or over. It’s $6,000 if you are under 50.
Qualified Charitable Deductions:
Before the SECURE Act, anyone eligible to take RMDs, age 70 ½ and over, could make a donation to a qualified charity directly from your IRA and the contribution not only wasn’t taxed but satisfied the RMD requirement too. For instance, if your RMD was $10,000 and you made a donation directly from your IRA to, say, the YMCA in the amount of $7,000, you would then only have to take an RMD of $3,000 and pay income tax on that amount. You would owe no income tax on the $7,000. The Act maintains that you can still make these types of charitable donations starting at age 70 ½, even if you aren’t required to take RMDs yet. The advantage of this extra flexibility is the ability to make charitable donations without ever having paid income tax on the money you contribute.
Thank you for your continuing confidence.