By Wire Reports
InsuranceNewsNet January 2, 2020
In last week's
column, I discussed three key provisions of the SECURE Act that will likely
affect the way you handle your IRA. These provisions went into effect on Jan. 1
and include 1) eliminating the stretch provision on inherited IRAs, 2)
increasing the RMD age from 70½ to 72, and 3) allowing individuals older than
70½ to make contributions to traditional IRAs.
This week we are
going to dig a little deeper into the SECURE Act. We will first look at a
potential trap for IRAs that have trusts as their beneficiaries. We will then
highlight some provisions of the SECURE Act designed specifically to help young
people.
As I discussed in
last week's column, the SECURE Act fundamentally changes the distribution rules
for inherited IRAs. If you inherit an IRA after Jan. 1, all assets in your
inherited IRA must be distributed before the end of the 10th year following the
year of the IRA creator's death. This is referred to as the "10-year
rule." There are no required minimum distributions before the end of the
10th year.
If you have
designated a trust as the beneficiary of your IRA, the 10-year rule could
create unanticipated problems for your heirs. For example, some trusts
stipulate that only required minimum distributions will be paid to the trust
and that the trust will then pass through any RMDs to the trust's named
beneficiaries.
In this case, the
10-year rule means that the beneficiaries will get nothing from the IRA until
year 10 and then it will come all at once. Serious tax consequences may result.
In any case, if your IRA beneficiary is a trust, have your attorney review the
trust language to make sure it still functions the way you intend.
The rule changes
for inherited IRAs are included in the SECURE Act under the heading
"Revenue Provisions," meaning they are intended to help offset the
cost of certain SECURE Act benefits. Some of the benefits are targeting specifically
at young people.
Saving for
retirement is difficult for a lot of young people. Many wrestle with competing
financial challenges and priorities, including starting a family. Given these
other priorities, the idea of squirreling money away in an inaccessible
retirement account is daunting. To help young families get past this hurdle,
the SECURE Act provides for something called a "Qualified Birth or
Adoption Distribution," or QBAD.
The QBAD allows a
new parent to withdraw up to $5,000 penalty-free from his or her IRA or
retirement. To qualify as a QBAD, the withdrawal must be made within one year
following their child's birth or adoption and the adopted child must be younger
than 18 years of age or mentally or physically incapable of self-support.
Although we do not
yet have final guidance from the Treasury Department, a close reading of the
SECURE Act seems to indicate that the QBAD limit is $5,000 per child per
individual. In other words, if a couple has a child, they can each take $5,000
from their retirement accounts and if they have twins, they can each take
$10,000.
The SECURE Act
allows parents who take a QBAD to "repay" themselves later. For
example, let's suppose Mary has a baby in early 2020 and decides to take a
$5,000 QBAD. Let's suppose in 2021, Mary has some extra money and wants to
repay her QBAD. In addition to her regular IRA or retirement plan contribution,
the SECURE Act allows Mary to re-contribute the $5,000 she took as a QBAD in
2020.
Other provisions of
the SECURE Act aimed at helping young people include changes to the rules for
529 plans. Under the act, qualified higher education expenses now include
expenses for apprenticeship programs including books, supplies and required
equipment as long as the program is appropriately registered and certified by
the Department of Labor.
In addition, up to
$10,000 of 529 plan money can be used to pay student loan principal or
interest. An additional $10,000 can be used to repay student loan debt for each
of the 529 beneficiary's siblings. These are per-person lifetime limits.
Changes to the 529
plan rules are retroactive to the beginning of 2019.
Steven C. Merrell
is an investment adviser and partner at Monterey Private Wealth Inc., in
Monterey. Send questions concerning investing, taxes, retirement or estate
planning to Steve Merrell, 2340 Garden Road Suite 202, Monterey 93940 or smerrell@montereypw.com.
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