New Rules for IRAs

A few weeks ago, I blogged about the IRS rules for Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Well, throw that one out. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “Secure Act”) was signed into law. The Secure Act changed several important aspects of IRA distributions and contributions.

One thing hasn’t changed. The new tax law still doesn’t allow untaxed retirement money to remain untaxed indefinitely. RMDs, inherited IRAs and other distribution rules are intended to make sure that Uncle Sam gets his share of taxpayers’ pre-tax retirement savings. The Secure Act changes the timing of when Uncle Sam gets his share.

Here are three major changes from the Secure Act that should you know, even if you aren’t close to retirement age:

  • Required Minimum Distribution (RMD) Age Increase

Under prior tax law, RMDs had to begin no later than April 1 following the year in which a person turned age 70½. For taxpayers who were not already age 70½ by December 31, 2019, the age to start taking RMDs is extended to 72. Distributions don’t have to be postponed to 72; it’s just an option. What’s better – waiting or not – depends on individual circumstances.

  • Contribution Age Restrictions Repealed 

Before the Secure Act, workers over age 70½ were not eligible to make contributions to an IRA. That contribution age limit has been eliminated. Yea! Slight damper on that celebration, though – the same rules about who can and cannot deduct a traditional IRA contribution apply, regardless of age. 

  • Inherited IRA “Stretch Distributions” Eliminated for Non-Spouses

Traditional IRAs that are inherited by someone other than the owner’s spouse can no longer be distributed over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This new rule eliminates the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.

Tax rules are always changing. The December 2019 Secure Act changed several rules about taking distributions from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Sure¸ taxpayers still can’t allow untaxed retirement money to remain untaxed indefinitely. Conversely, the repeal of the age limit on IRA contributions and other changes could positively impact how retirement distributions are taxed.

Need help figuring out the new rules? Get detailed tax advice that fits your situation from a qualified tax professional. You can find one near you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Want to Save for Retirement Tax-Free?

If you are thinking about skipping a 2016 IRA contribution because it’s not tax deductible – Think Again! Contributing to a non-deductible traditional or Roth IRA means growth that is never taxed. The earlier you begin investing in an IRA the longer you receive the benefit of tax-free growth.

 

Three common questions about IRAs:

 

How Much Can I Contribute?

Your maximum contribution amount for 2016 is $5,500 and an additional $1,000 for ages 50 or above. The contribution amount is based on filing status and modified adjusted gross income. For example, in 2016 a single taxpayer can make the maximum contribution up to a modified adjusted gross income amount of $117,000. Contributions are reduced the higher the income. In addition, don’t forget about checking with your employer to see if you can contribute any more into your employer- sponsored §401(k) plan, §403(b) plan or §457(b) plan before the year ends.

 

Can I Convert a Traditional IRA to a Roth?

If your income decreases and you fall into a lower bracket you could consider “converting” nondeductible traditional IRA funds into a Roth IRA and pay less tax in the year of conversion. You could pay less tax on the growth or perhaps no tax if your income has really dipped in a particular year or years. The conversion can be done in pieces and is not an all or nothing approach.

 

What About Distributions?

When you do start taking distributions on your IRA after age 59½, only some of it will be taxed and some will be a tax-free return of your investment. Distributions taken before age 59½ are subject to a 10% early withdrawal penalty.

 

These plans allow tax deferral and permit tax savings in the current year with the growth deferred into another period when distributions are received. For issues and questions dealing with a Roth IRA, nondeductible IRA and employer sponsored plans, contact me for more details.

Year-end Tax Planning for Procrastinators

For real procrastinators, the end of 2016 is a long way off. December 31 is the last day to take action on this year’s income tax liability. It’s not the last minute yet, but it’s coming up! Soon, it will be too late to act and lower that tax bill.

 

Four potential tax-saving actions to take before the year ends are:

 

  1. Maximize Retirement Savings

Most retirement savings plans must be funded by December 31. A SEP IRA or a defined benefits plan must be established before year-end and funded before the returns are filed for that tax year. Contribution limits vary by plan type. Deductible amounts depend on taxpayer circumstances. Taxpayers over 50 can make higher “catch-up” contributions.

 

More details about plans and contribution limits are on the IRS website at: http://bit.ly/1UBjXJf

 

  1. Manage Gains and Losses

Overall, financial markets performed well in 2016. The gain on sales of appreciated stocks, mutual funds, or other assets are taxable. Selling assets for a lower price than the purchase price results in a tax loss. Losses can be used to offset taxable gains. Losses in excess of gains are deductible up to $3,000 ($1,500 for married filing separately).

 

  1. Charitable Contributions

Cash and non-cash contributions made to a qualified charitable organization are deductible for taxpayers who itemize their deductions. To be deductible, contributions must be made to organizations designated as tax-exempt by the IRS. Amounts of $250 or more are required to be acknowledged in writing using language specified by the IRS.

 

More details about qualified charities and deduction rules are on the IRS website at:     http://bit.ly/2g9VDPl

 

  1. “Use or Lose” Benefits

Changes in tax laws that impact tax-preferred benefits and other items occur regularly. Those changes often impact taxpayer liability. Examples include Health Savings Accounts and Residential Energy Credits. The IRS website is a great resource to learn about the impact of tax law changes by performing a word search at www.irs.gov.

 

With only a few weeks left in 2016, it’s almost time for Real Procrastinators to take action on that income tax bill. Don’t wait – 2017 is almost here.