Beneficiaries would get a lifetime stretch, with the remaining balance going to a designated charity, but the downside is they don’t have access to the money freely, in the case of an emergency. There are two major changes under the new SECURE Act rules in 2020 and beyond:
Effective Date: Deaths after Dec. 31, 2019.
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We've detected you are on Internet Explorer. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com.https://www.barrons.com/articles/new-rules-for-stretch-iras-and-rmds-have-raised-many-questions-barrons-found-answers-51578831301The Secure Act was signed into law late last year, leaving retirement savers and retirees with little time to digest—and a lot of questions about—a host of new rules that are taking effect in 2020.Two changes that created particular confusion revolve around the age when required minimum distributions must be taken from tax-deferred accounts and the age limit for contributing to individual retirement accounts. The Secure Act bumped up the age for RMDs to 72 from 70½ and, as an acknowledgment of people living and working longer, will allow working seniors to continue making IRA contributions after age 70½.The new rules also upend a strategy surrounding inherited IRAs.
From an income tax perspective, this could be an option for those looking to leave their money with an inheritance, but not a hefty tax bill. Special rules apply for inherited IRAs where the IRA owner died prior to Jan. 1, 2020. The exceptions
The Secure Act, an expansive retirement law that went into effect Jan. 1, eliminated the “stretch IRA,” which allowed non-spousal beneficiaries to withdraw assets of inherited accounts over their lifetimes. “IRAs are designed to be lifetime income for you.” Still, with the loss of this method, IRA holders may need a new plan.
Some of these exemptions include beneficiaries who are the minor children of the deceased or beneficiaries who are chronically ill or disabled.For everyone else, the changes mean they will have to take steeper distributions—and pay taxes—when they may not be in need of the funds.The changes take effect in 2020, meaning that people who turn 70½ in 2020 can wait until they turn 72 to begin distributions.
Old rules allowed beneficiaries to stretch out RMDs over their lifetime, providing them with years to reap tax-advantaged gains.
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But people who turned 70½ by Dec. 31, 2019, would still operate under the old rules. What are the New 2020 Inherited IRA Rules and How Does it Impact Beneficiaries?
There is also a limited exception for existing commercial annuities, which may be held within defined contribution plans or IRAs.
“I recommend using an experienced estate attorney for anyone interested in this technique,” Haas said. The new rules also upend a strategy surrounding inherited IRAs. The new rules apply for people who would inherit an IRA from someone who isn’t their spouse and are not subject to other exemptions. There are ways to minimize that tax bill.
Warner Bros/Courtesy Everett Collection The cost basis is the amount the account holder paid for the investments — the “stepped-up” part of the name refers to the asset being adjusted to its fair market value at the time of Traditional IRA holders can begin taking withdrawals from their accounts to buy life insurance to benefit inheritors, said Brandon Opre, a financial adviser and founder of TrustTree Financial in Huntersville, N.C. “This may allow for not only a tax-free death benefit to be passed down, but the policy could potentially build up cash values to benefit their heirs over time.” People interested in this strategy should consider doing so when they’re younger.
Put another way, someone who was born in the first half of 1949 has to follow the old rules regarding RMDs, while someone who was born in the second half of that year does not.
Keeping these accounts as an inheritance for a non-spouse is still an option, but doing so could put adult children and other beneficiaries in a predicament, especially if they are near or in their peak earning years when they come into the money.
Another option for those with charities as beneficiaries: Qualified Charitable Distributions from IRAs, for people who are 70 1/2 and older. (The existing rules appear to still apply for nondesignated beneficiaries.)
For the best Barrons.com experience, please update to a modern browser. Traditional IRAs, which are funded with pre-tax dollars, can be converted into Roth IRAs, which house after-tax contributions.
Individual retirement account holders may have been quite surprised — perhaps unpleasantly — when new retirement legislation killed their attempt at a tax-advantageous inheritance for their loved ones. Inheritors would only have to pay taxes if they sell the investments after the account was transferred, according to Vanguard.
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stretch ira rules 2020