The year 2020 brings in a new decade and it also brings new tax laws. These new laws affect financial planning, and we want you to be informed. While taxes can be—well—taxing, we like to joke that they give us job security: tax laws change so much, it’s a full-time job keeping up with them and their implications!
These changes can affect many areas of your financial plan, so get with a financial planner soon to see what may be beneficial and what could be a detriment to you.
Let’s walk through some of the key highlights:
One of the areas affected the most by the new laws is inherited IRAs. You can no longer spread out distributions from inherited IRAs as much as you could previously.
So, for example, let’s say that you inherit an IRA from somebody that’s not your spouse. Under previous laws, a non-spouse beneficiary could choose to take RMDs based on their life expectancy.
For example, if you were 30 years old and had a 50-year life expectancy, you would’ve been able to spread the distributions over 50 years. That allowed beneficiaries to take a little bit out each year, spreading out the tax burden over a long period of time.
Now, however, the government wants their money sooner. They require you to take all the money out within 10 years of the IRA holder’s death. This forces you to take more money out each year, driving your income into higher tax brackets and causing you to pay more in taxes than you would have previously.
You can take a little out each year for 10 years, or you can wait and take it all out at year 10—but that would make the entire amount taxable in one year—which could be a tax nightmare.
Exceptions to the inherited IRA law
Now, there are five exceptions to the new law:
- Inheriting money from a spouse
- If the beneficiary is less than 10 years younger than the deceased account owner
- If the beneficiary is chronically ill or disabled
- If the beneficiary is a Minor child, they can wait until the age of majority before the 10-year clock begins ticking
- If you inherited an IRA prior to 2020, then you are not affected by the new law—it only applies to IRAs inherited after 2020
Under previous law, you had to start taking RMDs at 70 ½ RMDs (required minimum distributions) are where the government forces you to take money out of your pre-tax accounts (IRAs, 401(k)s, etc.) each year.
Uncle Sam hasn’t received any tax money yet from these accounts, so he makes sure he gets it at some point. See a trend here?
Well, under new law you can wait until age 72 to begin taking distributions. This let’s you hang on to your money a little longer before having to pay taxes on it.
If you turned 70 ½ in 2019, however, you missed the boat. You still have to take your RMDs as you did before.
Withdrawals for childcare and adoption changes
With a couple exceptions, there is a 10% penalty for everyone who withdraws money out of a retirement account before 59 ½. They’ve now added an additional exception for expenses related to having or adopting a child.
With the new changes, if you’re having or adopting a child, you can now withdraw up to $5,000 without the 10% tax penalty. Also, if you are a couple and have separate retirement accounts, that means you can take up to $10,000 with no penalty.
IRA contribution changes
In the past, if you were over the age of 70 ½ you could not contribute to your IRA anymore. This has now changed and if you still have earned income, then you can continue making contributions past 70 ½.
Be careful with this, however, because if you are using qualified charitable distributions, they can offset each other. This is a complicated area of the law and there are many different strategies involved, so if you have questions, set up a meeting with us to talk about it.
529 additional uses
Beginning in 2020, if you are the owner of a 529 plan, you will have more flexibility with the account. 529 accounts can be used to make one-time payments of up to $10,000 toward student loan repayments or cover costs for registered apprenticeships. You can now also use 529s for expenses toward elementary education, secondary education, and homeschooling.
As a reminder, these changes can affect many areas of your financial plan, so get with a financial planner soon to see what may be beneficial and what could be a detriment to you.
Written by Paul Winkler
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. This shall not constitute an offer to sell or solicit any offer to buy a security or any insurance product.