As if there are not enough issues in 2020 to process, legislative changes have been put into place that investors should be aware of and maximize this year. Here is a quick recap of what has changed, what the current rules are and what we might see happen in the near future with Individual Retirement Accounts (IRAs), Required Minimum Distributions (RMDs) and Qualified Charitable Distributions (QCDs).
Congress passed the SECURE Act in late 2019, pushing back the start of Required Minimum Distributions (RMDs) from age 70 ½ to age 72. Allowing individuals to defer these distributions allowed IRA balances to continue to grow with some additional tax deferral along the way.
Congress offset this additional tax deferral by changing the way non-spousal beneficiaries of IRAs would have to take out these assets. Previously, beneficiaries could stretch the payments over their own calculated life expectancy, which potentially allowed for decades of continued tax deferral. The SECURE Act now requires those assets to be completely withdrawn within ten years, accelerating the recognition of income and payment of income tax.
With respect to Qualified Charitable Distributions (QCDs), individuals remained eligible to make these tax-free distributions (up to $100,000 per person) to qualified charitable institutions from their IRAs at age 70 ½, despite RMDs being pushed back to age 72.
- Action Step: If you are over age 70 ½, consider completing any of your charitable gifts by utilizing a QCD.
In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act in late March. This relief package included the ability for any individual who would have been subject to taking an RMD in 2020 to waive that distribution for this year. This mirrored a similar provision that allowed IRA holders subject to RMDs to waive their RMD in 2009 in the depths of the Global Financial Crisis. While the CARES Act waived the RMD requirements, any IRA owner who has reached age 70 ½ can still make QCDs from their IRA in 2020.
- Action Step: If you don’t need your RMD in 2020, you can leave it in your IRA to continue to grow tax-deferred or consider doing a Roth conversion instead.
SECURING A STRONG RETIREMENT ACT OF 2020
This bipartisan legislation was just proposed on October 27 in the House of Representatives. There are a number of notable provisions within this bill that could have a big impact not only on retired IRA owners, but also workers currently saving for retirement.
For IRA owners, this bill would further delay the start of RMDs from the current age 72 (instituted by the SECURE Act) to age 75. In addition, if an IRA owner has less than $100,000 in their account, they would not be required to take any RMDs.
This bill also would increase the amount that an IRA owner could gift to charity via QCDs from $100,000 per year to $130,000 per year.
For those still working and in the accumulation phase, this bill has some potential benefits as well. Currently workers over age 50 can make a catch-up contribution of $6,500. The proposal in this bill would allow workers over age 60 to make catch-up contributions of $10,000 per year, indexed for inflation. This could be substantial for older workers trying to make up for lost time. For the younger workers, specifically those currently paying student loan debt, it would allow their employers to make a 401(k) match even if they are not yet contributing personally to the 401(k) because they are paying back student loans.
- Action Step: It is unclear if this has a good chance of progressing in the lame duck session of Congress as more focus is going to directed at an additional COVID-19 stimulus package. However, there may be a better chance of this being seriously considered in 2021.
Keeping track of the two significant pieces of legislation which are already law in addition to new potential bills and stimulus proposals is difficult. Talk to us about deciphering and maximizing changes in the current landscape that affect your retirement accounts. Budros, Ruhlin & Roe is here to make sense of it all for you.
Scott Kidwell, CFP®, RICP®
Senior Wealth Manager