SECURE Act Makes Changes for Retirees

by Brooks Mosley  

As you probably remember, investors had a horrific month for US Stocks in December of 2018. However, a lot can change in just twelve months. So, what does 2020 hold? Unfortunately, I do not have an exact answer, but I do have some good news that is the result of a new Bi-Partisan Bill. (Yes, I did intend to write Bi-Partisan.) 

On December 19, 2019, The SECURE Act was passed. This new legislation made some changes to the required minimum distribution (RMD) requirements from IRA’s and retirement plans.   

Prior to December 31, 2019, individuals were required to begin taking minimum distributions from their IRA’s, 401(k), 403(b), and other pre-tax retirement accounts beginning the year they turned 70 ½.  However, the SECURE Act mandates that for those born after July 1, 1949, the start date of the RMD’s will now be age 72. Making the distribution age a whole number definitely simplifies many aspects of this process, but like most new laws, this change is not as simple and straightforward as it seems. 

Here are a few things to note about the SECURE Act: 

Overall Changes to Required Minimum Distributions (RMD) 

Before the SECURE Act of December 2019, when you turned 70 ½ the IRS required you to take distributions from your pre-tax IRA’s and retirement accounts each year.  You did not have a choice. Uncle Sam wanted his pound of flesh as quickly as possible, and investors were forced to withdraw money from their retirement accounts and pay taxes on the distributions. 

With the SECURE Act, the start age for these RMD’s is delayed until the calendar year that an individual turns age 72.  You might ask: who istill subject to the old 70 ½ rule? The bill is good news unless you were unlucky enough to turn 70 ½ prior to December 31, 2019. If that is the case, you are still required to take RMD’s from your retirement accounts under the old 70 ½ RMD rule. To put simply:  

  • Date of Birth before July 1, 1949: Age 70 ½ RMD Start Date 
  • Date of Birth on/after July 1, 1949: Age 72 RMD Start Date 

April 1 Delay Retained 

Under the old RMD rules, when an individual turned age 70 ½, they had the option to delay their first RMD until April 1 of the following year.  However, in year 2, the individual was then required to take two RMD’s in that calendar year: one prior to April 1 for the previous tax year and one prior to December 31 for the current tax year. 

The April 1 exception for the first RMD year was retained by the SECURE Act as well as the requirement that if the RMD was voluntarily delayed until the following year that two RMD’s would need be taken in the second year. 

Changes to Qualified Charitable Distributions (QCD) 

Under the old rules, individuals who reached the RMD age of 70 ½ had the option of distributing all or a portion of their RMD directly to a charitable organization and avoid paying tax on the distribution. This option was reserved for individuals who had reached age 70 ½.   

Despite the delay of the RMD start date to age 72, individuals do not have to wait until Age 72 to make qualified charitable distributions. Investors will still be able to make tax-free charitable distributions from their IRA’s in the calendar year that they turn age 70 ½. The limit on QCDs is $100,000 for each calendar year. 

If you would like to learn more about QCDs or need to know how to report this on your tax return this year, please give your Ballew Wealth advisor a call—we can certainly help you with this. 

Changes to Income Reporting for Individuals Over 70 ½  

Another positive change is that The SECURE Act will now allow individuals who have earned income past age 70 ½ to be eligible to make contributions to Traditional IRAs and take a tax deduction for those contributions. 

Of course, Congress will not let you have your cake and eat it too. Any contributions made to a Traditional IRA past the age of 70 ½ will reduce the amount of your qualified charitable distribution that is tax free. 

Example:  A 76-year-old retiree was making $20,000 per year for the past 5 years. To reduce his tax bill, he contributed $7,000 per year ($35,000 total in this example) to a traditional IRA which is allowed under the new tax laws.  This year he is required to take a $50,000 RMD from his retirement accounts, and he wants to direct 100% to charity to avoid having to pay tax on the $50,000. Because he contributed $35,000 to a traditional IRA past the age of 70 ½, $35,000 of the QCD would be taxable income to him, while the remaining $15,000 would be a tax-free distribution to the charity. 

Thanks for taking a minute to read our newsletter. As always, we greatly appreciate and value your business and are here to answer any of your questions. 

I wish all of you a Safe and Prosperous New Year! 

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