Articles Posted in Retirement

Our tax advocates know that investing in an individual retirement account (IRA) can be an excellent way to set money aside for retirement and save on federal income taxes. An important caveat for traditional IRAs is the required minimum distribution (RMD). As the name implies, you must withdraw a minimum amount by a certain date, based on your age. A bill signed into law last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, raises the age for the RMD, and removes an obligation for banks to notify their IRA customers of an upcoming RMD date.. The new law took effect almost immediately, which might catch some banks by surprise. The IRS has therefore issued a notice giving latitude to banks that issue incorrect notices in 2020, provided they also issue a correction to those customers.

What Is a Required Minimum Distribution?

With a “traditional” IRA, you can contribute money before taxes up to a certain amount each year, but you must withdraw a minimum amount by a specified date. Prior to the SECURE Act, the Internal Revenue Code (IRC) required an RMD by April 1 of the calendar year following whichever occurs later:  the account owner reaches the age of 70½; or the account owner retires. This can be confusing for many people:

– If a person turned 70 years old on February 1, 2017, they would turn 70½ on August 1, 2017, and their RMD date would be April 1, 2018.
– If, however, they turned 70 on August 1, 2017, then they would turn 70½ on February 1, 2018, and their RMD date would be April 1, 2019.

This might be why the law required banks to notify customers with traditional IRAs of an upcoming RMD. Banks use IRS Form 5498 to show IRA contributions during the year. Box 11 shows whether an IRA owner must make an RMD. Boxes 12a and 12b show the RMD date and amount, respectively. Banks must send these forms out by January 31 of each year.

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In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with the intention of facilitating the creation and use of retirement accounts, including individual retirement accounts (IRAs) and 401(k) plans. Whether intentional or not, the bill has eliminated a popular tool used in estate planning known as the “stretch IRA,” which allowed people to convey an IRA to their heirs while minimizing tax liability. Some options may still be available, though, and our Los Angeles tax advisors can explain them.

What Was a Stretch IRA?

A stretch IRA was a way of passing both the value of a retirement account and its tax deferrals from generation to generation. The term does not describe a type of account, but rather a strategy used to maximize the returns on a retirement account passed down through a will with a minimal tax bill. It was most commonly used with traditional IRAs, which defer income taxes on contributions until the money is distributed to the owner or other beneficiary.

Under new rules found in the SECURE Act, owners of traditional IRAs must begin taking required minimum distributions (RMDs) by a certain date. The amount of the RMD is based on the account owner’s life expectancy, using IRS tables. The remaining balance of the account is divided by the number of years left in the owner’s life expectancy.

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