IRA RMD Start Date Changed From Age 70 ½ to Age 72 Starting In 2020
The SECURE Act was passed into law on December 19, 2019 and with it came some big changes to the required minimum distribution (“RMD”) requirements from IRA’s and retirement plans. Prior to December 31, 2019, individuals
The SECURE Act was passed into law on December 19, 2019 and with it came some big 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 mandatory distributions from their IRA’s, 401(k), 403(b), and other pre-tax retirement accounts starting in the year that they turned age 70 ½. The SECURE Act delayed the start date of the RMD’s to age 72. But like most new laws, it’s not just a simple and straightforward change. In this article we will review:
Old Rules vs New Rules surrounding RMD’s
New rules surrounding Qualified Charitable Distributions from IRA’s
Who is still subject to the 70 ½ RMD requirement?
The April 1st delay rule
Required Minimum Distributions
A quick background on required minimum distributions, also referred to as RMD’s. Prior to the SECURE Act, when you turned age 70 ½ the IRS required you to take small distributions from your pre-tax IRA’s and retirement accounts each year. For individuals that did not need the money, they did not have a choice. They were forced to withdraw the money out of their retirement accounts and pay tax on the distributions. Under the current life expectancy tables, in the year that you turned age 70 ½ you were required to take a distribution equaling 3.6% of the account balance as of the previous year end.
With the passing of the SECURE Act, the start age from these RMD’s is now delayed until the calendar year that an individual turns age 72.
OLD RULE: Age 70 ½ RMD Begin Date
NEW RULE: Age 72 RMD Begin Date
Still Subject To The Old 70 ½ Rule
If you turned age 70 ½ prior to December 31, 2019, you will still be required to take RMD’s from your retirement accounts under the old 70 ½ RMD rule. You are not able to delay the RMD’s until age 72.
Example: Sarah was born May 15, 1949. She turned 70 on May 15, 2019 making her age 70 ½ on November 15, 2019. Even though she technically could have delayed her first RMD to April 1, 2020, she will not be able to avoid taking the RMD’s for 2019 and 2020 even though she will be under that age of 72 during those tax years.
Here is a quick date of birth reference to determine if you will be subject to the old 70 ½ start date or the new age 72 start date:
Date of Birth Prior to July 1, 1949: Subject to Age 70 ½ start date for RMD
Date of Birth On or After July 1, 1949: Subject to Age 72 start date for RMD
April 1 Exception Retained
OLD RULE: In the the year that an individual turned age 70 ½, they had the option to delay their first RMD until April 1st of the following year. This is a tax strategy that individuals engaged in to push that additional taxable income associated with the RMD into the next tax year. However, in year 2, the individual was then required to take two RMD’s in that calendar year: One prior to April 1st for the previous tax year and the second prior to December 31st for the current tax year.
NEW RULE: Unchanged. The April 1st 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.
Qualified Charitable Distributions (QCD)
OLD RULES: Individuals that had reached the RMD age of 70 ½ had the option to distribute all or a portion of their RMD directly to a charitable organization to avoid having to pay tax on the distribution. This option was reserved only for individuals that had reached age 70 ½. In conjunction with tax reform that took place a few years ago, this has become a very popular option for individuals that make charitable contributions because most individual taxpayers are no longer able to deduct their charitable contributions under the new tax laws.
NEW RULES: With the delay of the RMD start date to age 72, do individuals now have to wait until age 72 to be eligible to make qualified charitable distributions? The answer is thankfully no. Even though the RMD start date is delayed until age 72, individuals 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 still $100,000 for each calendar year.
NOTE: If you plan to process a qualified charitable distributions from your IRA after age 70 ½, you have to be well aware of the procedures for completing those special distributions otherwise it could cause those distributions to be taxable to the owner of the IRA. See the article below for more on this topic:
ANOTHER NEW RULE: There is a second new rule associated with the SECURE Act that will impact this Qualified Charitable Distribution strategy. Under the old tax law, individuals were unable to contribute to Traditional IRA’s past the age of 70 ½. The SECURE Act eliminated that rule so individuals that have earned income past age 70 ½ will be eligible to make contributions to Traditional IRAs and take a tax deduction for those contributions.
As an anti-abuse provision, any contributions made to a Traditional IRA past the age of 70 ½ will, in aggregate, dollar for dollar, reduce the amount of your qualified charitable distribution that is tax free.
Example: A 75 year old retiree was working part-time making $20,000 per year for the past 3 years. To reduce her tax bill, she contributed $7,000 per year to a traditional IRA which is allowed under the new tax laws. This year she is required to take a $30,000 required minimum distribution (RMD) from her retirement accounts and she wants to direct that all to charity to avoid having to pay tax on the $30,000. Because she contributed $21,000 to a traditional IRA past the age of 70 ½, $21,000 of the qualified charitable distribution would be taxable income to her, while the remaining $9,000 would be a tax free distribution to the charity.
$30,000 QCD – $21,000 IRA Contribution After Age 70 ½ = $9,000 tax free QCD
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
New Rules For Non Spouse Beneficiaries Of Retirement Accounts Starting In 2020
The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts
The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts starting in 2020. Unfortunately, with the passing of this law, Congress took away one of the most valuable distribution options available to non-spouse beneficiaries called the “stretch” provision. Non-spouse beneficiaries would utilize this distribution option to avoid the tax hit associated with having to take big distributions from pre-tax retirement accounts in a single tax year. This article will cover:
The old inherited IRA rules vs. the new inherited IRA rules
The new “10 Year Rule”
Who is grandfathered in under the old inherited IRA rules?
Impact of the new rules on minor children beneficiaries
Tax traps awaiting non spouse beneficiaries of retirement accounts
The “Stretch” Option Is Gone
The SECURE Act’s elimination of the stretch provision will have a big impact on non-spouse beneficiaries. Prior to January 1, 2020, non-spouse beneficiaries that inherited retirement accounts had the option to either:
Take a full distribution of the retirement account within 5 years
Rollover the balance to an inherited IRA and stretch the distributions from the retirement account over their lifetime. Also known as the “stretch option”.
Since any money distributed from a pre-tax retirement account is taxable income to the beneficiary, many non-spouse beneficiaries would choose the stretch option to avoid the big tax hit associated with taking larger distributions from a retirement account in a single year. Under the old rules, if you did not move the money to an inherited IRA by December 31st of the year following the decedent’s death, you were forced to take out the full account balance within a 5 year period.
On the flip side, the stretch option allowed these beneficiaries to move the retirement account balance from the decedent’s retirement account into their own inherited IRA tax and penalty free. The non-spouse beneficiary was then only required to take small distributions each year from the account called a RMD (“required minimum distribution”) but was allowed to keep the retirement account intact and continuing to accumulate tax deferred over their lifetime. A huge benefit!
The New 10 Year Rule
For non-spouse beneficiaries, the stretch option was replaced with the “10 Year Rule” which states that the balance in the inherited retirement account needs to be fully distributed by the end of the 10th year following the decedent’s date of death. The loss of the stretch option will be problematic for non-spouse beneficiaries that inherit sizable retirement accounts because they will be forced to take larger distributions exposing those pre-tax distributions to higher tax rates.
No RMD Requirement Under The 10 Year Rule
Even though the stretch option has been lost, beneficiaries will have some flexibility as to the timing of when distributions will take place from their inherited IRA. Unlike the stretch provision that required the non-spouse beneficiary to start taking the RMD’s the year following the decedent’s date of death, there are no RMD requirements associated with the new 10 year rule. Meaning in extreme cases, the beneficiary could choose not to take any distributions from the retirement account for 9 years and then in year 10 distribute the full account balance.
Now, unless you love paying taxes, very few people would elect to distribute a large pre-tax retirement account balance in a single tax year but the new rules give you a decade to coordinate a distribution strategy that will help you to manage your tax liability under the new rules.
Tax Traps For Non-Spouse Beneficiaries
These new inherited IRA distribution rules are going to require pro-active tax and financial planning for the beneficiaries of these retirement accounts. I’m lumping financial planning into that mix because taking distributions from pre-tax retirement accounts increases your taxable income which could cause the following things to happen:
Reduce the amount of college financial aid that your child is receiving
Increase the amount of your social security that is considered taxable income
Loss of property tax credits such as the Enhanced STAR Program
Increase your Medicare Part B and Part D premiums the following year
You may phase out of certain tax credits or deductions that you were previously receiving
Eliminate your ability to contribute to a Roth IRA
Loss of Medicaid or Special Needs benefits
Ordinary income and capital gains taxed at a higher rate
You really have to plan out the next 10 years and determine from a tax and financial planning standpoint what is the most advantageous way to distribute the full balance of the inherited IRA to minimize the tax hit and avoid triggering an unexpected financial consequence associated with having additional income during that 10 year period.
Who Is Grandfathered In?
If you are the non-spouse beneficiary of a retirement account and the decedent passed away prior to January 1, 2020, you are grandfathered in under the old inherited IRA rules. Meaning you are still able to utilize the stretch provision. Here are a few examples:
Example 1: If you had a parent pass away in 2018 and in 2019 you rolled over their IRA into your own inherited IRA, you are not subject to the new 10 year rule. You are allowed to stretch the IRA distributions over your lifetime in the form of those RMD’s.
Example 2: On December 15, 2019, you father passed away and you are listed as the beneficiary on his 401(k) account. Since he passed away prior to January 1, 2020, you would still have the option of setting up an Inherited IRA prior to December 31, 2020 and then stretching the distributions over your lifetime.
Example 3: On February 3, 2020, your uncle passes away and you are listed as a beneficiary on his Rollover IRA. Since he passed away after January 1, 2020, you would be required to distribute the full IRA balance prior to December 31, 2030.
You are also grandfathered in under the old rules if:
The beneficiary is the spouse
Disabled beneficiaries
Chronically Ill beneficiaries
Individuals who are NOT more than 10 years younger than the decendent
Certain minor children (see below)
Even beyond 2020, the beneficiaries listed above will still have the option to rollover the balance into their own inherited IRA and then stretch the required minimum distributions over their lifetime.
Minor Children As Beneficiaries
The rules are slightly different if the beneficiary is the child of the decedent AND they are still a minor. I purposely capitalized the word “and”. Within the new law is a “Special Rule for Minor Children” section that states if the beneficiary is a child of the decedent but has not reached the age of majority, then the child will be able to take age-based RMD’s from the inherited IRA but only until they reach the age of majority. Once they are no longer a minor, they are required to distribute the remainder of the retirement account balance within 10 years.
Example: A mother and father pass away in a car accident and the beneficiaries listed on their retirement accounts are their two children, Jacob age 10, and Sarah age 8. Jacob and Sarah would be able to move the balances from their parent’s retirements accounts into an inherited IRA and then just take small required minimum distributions from the account based on their life expectancy until they reach age 18. In their state of New York, age 18 is the age of majority. The entire inherited IRA would then need to be fully distributed to them before the end of the calendar year of their 28th birthday.
This exception only applies if they are a child of the decedent. If a minor child inherits a retirement account from a non-parent, such as a grandparent, then they are immediately subject to the 10 year rule.
Note: the age of majority varies by state.
Plans Not Impacted Until January 1, 2022
The replacement of the stretch option with the new 10 Year Rule will impact most non-spouse beneficiaries in 2020. There are a few exceptions to that effective date:
403(b) & 457 plans sponsored by state and local governments, including Thrift Savings Plans sponsored by the Federal Government will not lose the stretch option until January 1, 2022
Plans maintained pursuant to a collective bargaining agreement also do not lose the stretch option until January 1, 2022
Advanced Planning
Under the old inherited IRA rules there was less urgency for immediate tax planning because the non-spouse beneficiaries just had to move the money into an inherited IRA the year after the decedent passed away and in most cases the RMD's were relatively small resulting in a minimal tax impact. For non-spouse beneficiaries that inherit a retirement account after January 1, 2020, it will be so important to have a tax plan and financial plan in place as soon as possible otherwise you could lose a lot of your inheritance to higher taxes or other negative consequences associated with having more income during those distribution years.
Please feel free to contact us if you have any questions on the new inherited IRA rules. We would also be more than happy to share with you some of the advanced tax strategies that we will be using with our clients to help them to minimize the tax impact of the new 10 year rule.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
New York May Deviate From The New 529 Rules
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school,
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school, religious school, or homeschooling expenses. These distributions would be considered “qualified” which means distributions are made tax free.
Initially we expected this new benefit to be a huge tax advantage for our clients that have children that attend private school. They could fully fund a 529 plan up to $10,000 per year, capture a New York State tax deduction for the $10,000 contribution, and then turn around and distribute the $10,000 from the account to make the tuition payment for their kids.
New York May Deviate
States are not required to adhere to the income tax rules set forth by the federal government. In other words, states may choose to adopt the new tax rules set forth by the federal government or they can choose to ignore them. The new tax laws that went into effect in 2018 will impact states differently. More specifically, tax payers in states that have both income taxes and high property taxes, like New York and California, may be adversely affected due to the new $10,000 cap on the ability to fully deduct those expenses on their federal tax return.
As of June 30, 2018, New York has yet to provide guidance as to whether or not they will recognize the K -12 distributions from 529 plans as “qualified”. More than 30 states have already announced that they will adhere to the new federal tax rules. On the opposite side of that coin, California has announced that they will not adhere to the new 529 tax rules and they will tax distribution made for K – 12 expenses. Oregon has gone one step further and will not only tax the distributions but they will also recapture state tax deductions taken for distributions made for K – 12 expenses.
Wait & See
If you live in a state like New York that has yet to provide guidance with regard to the new 529 rules, you end up in this wait and see scenario. There is no way to know which way New York is going to rule on this new federal tax rule. However, if New York follows the path taken by many of the other states that were adversely affected by the new federal tax rules, they may decide to follow suit and choose to ignore the new 529 tax rules adopted by the federal government.
We also don’t have any guidance as to when NYS will rule on this issue. They may wait until November or December to issue formal guidance. If that happens, 529 account owners looking to take advantage of the new K – 12 distribution rules will have to be on their toes because distributions from 529 accounts have to happen in the same year that the expense is incurred in order to receive the preferentially tax treatment.
Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Moving Expenses Are No Longer Deductible
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and moving. Even things like how you are going to transport your car over to your new home, can take up a lot of your time, and on top of that, you have to think about how much it's going to cost. Prior to the tax law changes that took effect January 1, 2018, companies would often offer new employees a "relocation package" or "moving expense reimbursements" to help subsidize the cost of making the move. From a tax standpoint, it was great benefit because those reimbursements were not taxable to the employee. Unfortunately that tax benefit has disappeared in 2018 as a result of tax reform.
Taxable To The Employee
Starting in 2018, moving expense reimbursements paid to employee will now represent taxable income. Due to the change in the tax treatment, employees may need to negotiate a higher expense reimbursement rate knowing that any amount paid to them from the company will represent taxable income.
For example, let’s say you plan to move from New York to California and you estimate that your moving expense will be around $5,000. In 2017, your new employer would have had to pay you $5,000 to fully reimburse you for the moving expense. In 2018, assuming you are in the 35% tax bracket, that same employer would need to provide you with $6,750 to fully reimburse you for your moving expenses because you are going to have to pay income tax on the reimbursement amount.
Increased Expense To The Employer
For companies that attract new talent from all over the United States, this will be an added expense for them in 2018. Many companies limit full moving expense reimbursement to executives. Coincidentally, employees at the executive level are usually that highest paid. Higher pay equals higher tax brackets. If you total up the company's moving expense reimbursements paid to key employees in 2017 and then add another 40% to that number to compensate your employees for the tax hit, it could be a good size number.
Eliminated From Miscellaneous Deductions
As an employee, if your employer did not reimburse you for your moving expenses and you had to move at least 50 miles to obtain that position, prior to 2018, you were allowed to deduct those expenses when you filed your taxes and you were not required to itemize to capture the deduction. However, this expense will no longer be deductible even for employees that are not reimbursed by their employer for the move starting in 2018.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
No Deduction For Entertainment Expenses In 2019. Ouch!!
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses were able to deduct in 2017 will no longer we allowed in 2018 and beyond. A big ouch for business owners that spend a lot of money entertaining clients and prospects.
A Quick Breakdown Of The Changes
new tax rules for entertainment expenses
No Deduction in 2019
Prior to 2018, if the business spent money to take a client out to a baseball game, meet a client for 18 holes of golf, or to host a client event, the business would be able to take a deduction equal to 50% of the total cost associated with the entertainment expense. Starting in 2018, you get ZERO. There is no deduction for those expenses.
The new law specifically states that there is no deduction for:
Any activity generally considered to be entertainment, amusement, or recreation
Membership dues to any club organization for recreation or social purpose
A facility, or portion thereof, used in connection with the above items
This will inevitably cause business owners to ask their accountant: “If I spend the same amount on entertainment expenses in 2018 as I did in 2017, how much are the new tax rules going to cost me tax wise?”
Impact On Sales Professionals
If you are in sales and big part of your job is entertaining prospects in hopes of winning their business, if your company can no longer deduct those expenses, are you going to find out at some point this year that the company is going to dramatic limit the resources available to entertain clients? If they end up limiting these resources, how are you supposed to hit your sales numbers and how does that change the landscape of how you solicit clients?
Impact On The Entertainment Industry
This has to be bad news for golf courses, casinos, theaters, and sports arena. As the business owner, if you were paying $15,000 per year for your membership to the local country club and you justified spending that amount because you knew that you could take a tax deduction for $7,500, now what? Now that you can’t deduct any of it, you may decide to cancel your membership or seek out a cheaper alternative.
Impact On Charitable Organizations
How do most charities raise money? Events. As you may have noticed in the chart, in 2017 tickets to a qualified charitable event were 100% deductible. In 2018, it goes from 100% deductible to Zero!! It’s bad enough that the regular entertainment expenses went from 50% to zero but going from 100% to zero hurts so much more. Also charitable events usually have high price tags because they have to cover the cost of event and raise money for the charity. In 2018, it will be interesting to see how charitable organizations get over this hurdle. It may have to disclose right on the registration form for the event that the ticket cost is $500 but $200 of that amount is the cost of the event (non-deductible) and $300 is the charitable contribution.
Exceptions To The New Rules
There are some unique exceptions to the new rules. Many business owners will not find any help within these exceptions but here they are:
Entertainment, amusement, and recreation expenses you treat as compensation to your employees in their wages (In other words, the cost ends up in your employee’s W2)
Expenses for recreation, social, or similar activities, including facilities, primarily for employees, and it can’t be highly compensation employees (“HCE”). In 2018 an HCE employee is an employee that makes more than $120,000 or is a 5%+ owners of the company.
Expenses for entertainment goods, services, and facilities that you sell to customers
What’s The Deal With Meals?
Prior to 2018, employers could deduct 50% of expenses for business-related meals while traveling. Also meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Starting in 2018, meal expenses incurred while traveling on business remain 50% deductible to the business. However, meals provided via an on-premises cafeteria or otherwise on the employers premise for the convenience of the employer will now be limited to a 50% deduction.
There is also a large debate going on between tax professional as to which meals or drinks may fall into the “entertainment” category and will lose their deduction entirely.
Impact On Business
This is just one of the many “small changes” that was made to the new tax laws that will have a big impact on many businesses. It may very well change the way that businesses spend money to attract new clients. This in turn will most likely lead to unintended negative consequences for organizations that operate in the entertainment, catering, and charitable sectors of the U.S. economy.
Disclosure: For education purposes only. Please seek tax advice from your tax professional
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
