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Your retirement account in 2020

Your retirement account in 2020

During the past two years, our donors have increased their use of a charitable rollover for many of their philanthropic contributions to the Diocese of Spokane and the Catholic Foundation. Congress has now changed the age of mandatory retirement withdrawal from 70.5 to 72, but with some nuance and caveats. I have asked Peter Moye, an attorney with Witherspoon Brajcich McPhee, to address the revisions. Peter specializes in estate planning, probate, and trusts. He serves as chair of the Catholic Foundation and is a parishioner at the Cathedral of Our Lady of Lourdes. He can be contacted at pmoye@workwith.com or 509.252.5658.

We all know that it is, or has been, essential to save for retirement. In fact, for many people, their Individual Retirement Account (IRA) or their company 401(k) plans have been methods to save for retirement. These accounts and others offer a combination of upfront and future tax benefits that could add up to thousands of extra dollars for your retirement.

When Congress first enacted the rules governing retirement funds, one of its goals was to make sure that people did not keep their money in retirement accounts forever. One of the rules governing IRAs, 401(k)s, and other retirement accounts required a minimum distribution. The rule is simple: In the year in which you reach the age of 70 ½, you must begin withdrawing a certain amount from your retirement account, which is based on a formula. If you failed to take a required minimum distribution (RMD),  you would be penalized up to 50 percent of the amount that you should have withdrawn from the account.

Along with the ability to have the money in a retirement account grow tax-free (however taxed upon withdrawal), a spouse could roll over his or her deceased spouse’s IRA into his or her existing IRA, and, if the surviving spouse had not yet reached 70 ½, not have to make any withdrawals. Your children could inherit an IRA and take the distributions out over their anticipated life expectancies. All these benefits allowed financial advisers and attorneys to provide some creative estate planning.

All of that has recently changed, as Congress passed and the president signed a new act regarding retirement accounts in December 2019, called the “Setting Every Community Up for Retirement Enhancement Act” (SECURE). The act became effective Jan. 1, 2020. Here is what you need to know about the change, good and bad.

The Good: Instead of having the required beginning age for RMDs set at 70 1/2, (or when retired, if later), it has been pushed to age 72. Along with the push to begin withdrawals from retirement accounts to a later age, the act allows contributions to traditional IRAs after age 70 1/2, which was not allowed before. Congress said because Americans are living longer and working past 70, this rule change will give workers an opportunity to increase or catch up with their retirement savings. The ability to contribute more and allow the retirement account to grow untouched are big benefits.

The not-so-good provision is that, in most instances, SECURE eliminates the ability to stretch out the IRA inherited by your children or grandchildren. The act now mandates inherited IRAs with a non-spouse beneficiary (child or grandchild) must be withdrawn within 10 years. There are exceptions for minor beneficiaries with chronic illnesses or special needs. Minor children are entitled to the life expectancy payout until they reach the age of majority, when the 10-year rule kicks in.

You can still make charitable contributions from your IRA or retirement account. Normally, a distribution from a traditional IRA incurs taxes, as the account holder didn’t pay taxes on the money when they put it into the IRA. But account holders 72 or older who make a contribution directly from a traditional IRA to a qualified charity can donate up to $100,000 without it being considered a taxable distribution. The deduction effectively lowers the donor's adjusted gross income.

To avoid paying taxes on the donation, the donor must follow IRS rules for qualified charitable distributions, a.k.a. charitable IRA rollovers. Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(c)3 organizations, as are the diocese and Catholic Foundation. The charity will also not pay taxes on the donation.

This article was meant to be a basic overview of the changes SECURE Act made to the distribution rules for IRAs and other retirement plans commencing 2020. Please contact your financial adviser, CPA, or attorney to determine whether these changes affect you or your prior estate planning.