Because You Asked: Do I Need to Be Concerned About the 2019 Tax Law?

2019 Tax Law Changes for IRA’s and other Non-Qualified Accounts: The SECURE Act

With the passage of yet another new tax law near the very end of 2019  that has a far-reaching impact, I think you can safely say it has left Certified Financial Planners ™, attorneys, CPA’s and EA’s scrambling to both learn the new rules, and then trying to figure out strategies to protect their clients.  I know that we have spent an enormous amount of time trying to wrap our minds around all of it.

One of the most critical components for financial planning is that the old tax law allowed your non-spouse beneficiaries of IRA’s to stretch them over their lifetimes, with Required Minimum Distributions annually, based on their age.  The NEW tax law no longer has those Required Minimum Distributions, except: the entire account must be distributed by the end of the 10th year following the death of the original owner who dies in 2020 or later.  (The old rules still apply to anyone who died before 1/1/20.)

Note that the 10-year limit does not apply to spousal beneficiaries, only to non-spouses.  There are a few exceptions other than spouses, but for those non-spouse beneficiaries, while blessed to receive an inheritance, your heirs could find it to be very punitive tax-wise, as all of the IRA distributions will be added to their income.  Additionally, if for estate planning purposes you set up an IRA with a Trust as the beneficiary, the 10-year distribution rule still applies, but at even higher tax rates.

It is also important to note that the decrease in tax rates that we had with TJCA’s 2018’s tax law, expire in 2025, and we have no way of knowing what the new tax brackets/rates will turn out to be at that time.  So, what do we do?

Here are some considerations for individuals who have IRA/Qualified Accounts valued at $500,000 or more, & who don’t expect to use most of it over their lifetime.

  1. Review your beneficiaries: 
      • If a trust, you need to meet with your attorney and tax expert as soon as possible to make any necessary changes to avoid unintended, punitive tax consequences.
      • Consider increasing the number of designated beneficiaries, if you have significant assets in pre-tax accounts: consider not only your children, but grandchildren and other family members, and/or charities.
          • In fact, if you designate a charity as a beneficiary of an IRA, there will be zero tax applied to those distributions.
    1. Tax Bracket Management: Utilize the current lower individual tax rates to convert and/or distribute as much as you can from these IRA’s now, paying taxes on these distributions over time, while utilizing lower brackets of 20-24%.    This is especially effective for couples who file taxes as “Married Filing Jointly”.  Keep in mind that most distributions will require you to be age 59 1/2 or older or you will incur an additional 10% tax penalty.
    2. Roth Conversions: Keeping in mind those tax rates mentioned above, whenever possible it can be a great strategy to step up your Roth Conversions. There is no limit to the amount of pre-tax, IRA funds that you can “convert” to a Roth IRA, and pay the tax in the year of the conversion.  This can be done over multiple years, and at any age; you do not have to wait until age 59 1/2 to do a Roth Conversion.  Remember that while Roth IRA’s have a 5-year holding period, you can still access your principal, but if you leave the gains/growth in the account for five years, there will be no tax paid on the growth, either by you or your beneficiaries.  Your Non-spouse beneficiaries will still have to take the money out within that 10-year window after your death, they just won’t pay any taxes on it.
    3. Qualified Charitable Distributions: after age 70 ½, you are eligible to make distributions from your IRA accounts to a charity, and never pay tax on that money.  This actually has a greater tax benefit for you, rather than taking a distribution to yourself and then making your charitable contributions.  Your tax professional can give you some idea of the impact on your personal tax situation.

Everyone’s circumstances are unique, and these ideas should simply be a basis for discussion with your chosen professionals, who will help to develop the best strategy for you.

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