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nitpicker

(7,153 posts)
Sun Feb 23, 2020, 11:51 AM Feb 2020

If you have an IRA, 401K, or other deferred compensation retirement account- LISTEN UP

(xpost from GD)

If you have an IRA, 401K, or other deferred compensation retirement account- LISTEN UP


Your beneficiaries may have to take out all the money (and pay taxes on it) within 10 years of your death.

I didn’t know about this until an association e-mailed me that there would be a speaker on ”Securing your Wealth under The SECURE Act”.

I Googled it, and found “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” had been incorporated into the provisions of HR 1865, aka Public Law 116-94.

The text https://www.congress.gov/bill/116th-congress/house-bill/1865/text?format=txt contains (Division O, near the end) various provisions about retirement accounts.

DUers previously noted https://www.democraticunderground.com/100212826849 certain benefits of those provisions (1. If you hadn’t reached 70 ½ yet by 31 Dec 2019, the deadline for starting required minimum distributions is now 1 Apr the year after the year you reach 72; 2. You can contribute to a traditional IRA if you are working past 70 ½).

HOWEVER, Congress decided to raise revenues.

If somebody died before 1 Jan 2020, the rules didn’t change. BUT the rules changed for many of those who are, or will become, beneficiaries of those who died after 31 Dec 2019. There are exceptions for surviving spouses, beneficiaries (e,g, parents, siblings, cousins, others) no more than 10 years younger than the account owner, disabled and chronically ill persons, and minor children (not grandchildren). However, once minor children reach maturity, whatever is left has to be distributed within 10 years.

For the other beneficiaries of those who have/will die after 31 Dec 2019, one analyst said https://www.myfederalretirement.com/inherit-iras/ the new rules of those beneficiaries having to withdraw within 10 years of death apply not just to Traditional IRAs, but also to Roth IRAs, regular 401Ks, TSPs that get rolled over into “inherited” IRAs, and other deferred compensation retirement accounts. ((TSP is officially still considering if the SECURE Act does apply to it, and TSPs that don’t get rolled over into IRAs must be withdrawn within 5 years.))

These other beneficiaries NO LONGER have the option to stretch payments (and taxes) over their lifetime. Instead, the money has to be distributed to them within 10 years. (There IS the option to have a lump sum at the end of 10 years, but someone suggests this only be done if it’s a Roth IRA or Roth inherited IRA.)

Impact: Granny dies after 31 Dec 2019 and her 60-year-old kid is the beneficiary of $25,000 traditional IRA/401K/etc.

In the first year, under the old rules, this non-exempt beneficiary would have had to take distributions of (at least) $1000 (numbers rounded) and pay income tax on it. Assuming single in a decent job, that’s 22% tax due on it, or $220 on $1000.

If the beneficiary wanted to evenly spread the distribution over the 10 years under the new rules, the annual withdrawal would be $2500. That raises tax due on that to $550.

((plus state taxes))

Double the account amount? Double the federal tax due (on $5000 withdrawn evenly each year) to $1100. The IRS becomes VERY Interested it people fall behind on timely paying of taxes by $1000 or more. The beneficiary should either (1) have the “IRA Custodian” (e.g. bank) withhold the tax due on the distribution, or (2) pay the IRS, via estimated taxes, the applicable tax due no later than the 15th of the month after the calendar year quarter in which the distribution was made.

Let’s not forget the impact on Social Security taxation. Taxable IRA/401k/etc. benefits are counted as income. Unless the beneficiary already has a pension so generous that a full 85% of SS benefits is already taxable, the IRA/etc amount distributed in a year can increase the amount of taxable SS benefits.

Example: The elderly account owner leaves a $250,000 balance in a regular 401k. A non-exempt beneficiary spreading it out over 10 years will have to take distributions averaging $25,000 a year. This will almost certainly cause some (or all) of any SS benefits received to become more-taxable (again unless the other pension/income is so generous that 85% of SS is already taxable). Plus there will be federal income tax due (on a distribution of $25,000 at 22%= $5,500).

In short:

1. It usually doesn’t work anymore to choose a much younger beneficiary ((e.g. adult grandkid)) versus their parent;
2. If you are an account owner, you may want to find some way to ensure beneficiaries can pay distribution taxes;
3. If you are/will be a non-exempt beneficiary, plan on how to handle the accelerated distributions and taxes.

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If you have an IRA, 401K, or other deferred compensation retirement account- LISTEN UP (Original Post) nitpicker Feb 2020 OP
That is right, and it was pass by a bipartisan Congress. I suspect some are quite happy with this still_one Feb 2020 #1
One option is to slowly covert an account to a Roth IRA, pay taxes and that conversion, and when the still_one Feb 2020 #2
Re: Roth IRAs. Also withdrawals from Traditional IRAs could mean higher Medicare premiums progree Feb 2020 #3

still_one

(91,949 posts)
1. That is right, and it was pass by a bipartisan Congress. I suspect some are quite happy with this
Sun Feb 23, 2020, 11:58 AM
Feb 2020

thinking it will “soak the rich”, but it will actually adversely affect the middle class the most.



still_one

(91,949 posts)
2. One option is to slowly covert an account to a Roth IRA, pay taxes and that conversion, and when the
Sun Feb 23, 2020, 12:10 PM
Feb 2020

beneficiaries inherit the Roth they can let it accumulate tax free for 10 years, and then take the tax free distribution

progree

(10,864 posts)
3. Re: Roth IRAs. Also withdrawals from Traditional IRAs could mean higher Medicare premiums
Sun Feb 23, 2020, 12:38 PM
Feb 2020
(There IS the option to have a lump sum at the end of 10 years, but someone suggests this only be done if it’s a Roth IRA or Roth inherited IRA.)


Yes, smart move. Roth IRAs are tax free accounts (compound tax-free, withdrawals are tax free). So you want to keep this money in a tax free (i.e. the Roth) account as long as possible. And on withdrawal, even if it's $999 Gazillion, it doesn't raise one's tax one iota. Nor does the withdrawal affect taxation of S.S. benefits nor does it increase Medicare premiums.

Whereas for Traditional IRAs, if one takes a big withdrawal (aka distribution) in one year, that all is taxable income in that year, so if it's a big withdrawal amount, it could put one up into a higher tax bracket or two or more. Thus it's better to spread it out over several years.

With withdrawals (distributions) from traditonal IRA's, it's not just the taxation of the withdrawal amount plus extra taxation of Social Security benefits that one must consider. One may also run into increased Medicare Part B and Part D premiums beginning at a MAGI (Modified Adjusted Gross Income) of $87,000 singles / $174,000 Married Filing Jointly.

Those income levels are for 2018 (the premiums are surcharged in 2020). The income levels for 2019 won't be announced until November 2020, and the levels for 2020 won't be announced until November 2021 (yes, I know, 2019 has already passed, so yes, one can't do tax planning in 2020 except to guess that it will go up by about $2,000 ($4,000 for MFJ) in 2019 and another $2,000 ($4,000 MFJ) in 2020 ... it depends on inflation).

Modified Adjusted Gross Income (MAGI) is regular AGI plus tax-exempt interest like from municipal bonds / bond funds.

More on Medicare premium surcharges: Google: Medicare IRMAA.

For example here's the brackets for Part B: (same MAGI thresholds apply to Part D, but the surcharges are less)
https://www.medicare.gov/your-medicare-costs/part-b-costs

As far as bipartisan -- it passed the House by 417 to 3 in May 2019. In the Senate, it was part of the 2020 fiscal year appropriations bill (which passes 71 to 23), but that vote was on much more than just the SECURE Act part of it.

EDITED TO ADD:

The GD thread is at https://www.democraticunderground.com/100213010607

Another good place to post is Personal Finance and Investing https://www.democraticunderground.com/?com=forum&id=1121

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