While almost everyone has been impacted as a result of the pandemic, retirees have faced their own unique set of challenges. Between maintaining their own health and safety, considering how their nest eggs could be affected by economic unrest and understanding new legislation, it’s been a whirlwind of a year. With the introduction of both the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the beginning of 2020, and the Coronavirus Aid, Relief and Economic Security (CARES) Act just three months later, we have some of the most comprehensive retirement reform and economic relief in over a decade. At a time when life couldn’t be more uncertain, we must plan for the future.
While both Acts offer beneficial relief and aid to Americans, it can be hard to decipher what the changes mean for you and your retirement. Below we hope to clarify some of the more prominent and timely changes made, specifically with regards to Required Minimum Distributions (RMD).
2020 RMD Waiver
For individuals currently required to take RMDs from tax-deferred retirement accounts, including inherited IRAs, the CARES Act allows for the suspension of 2020 RMDs. For those that had already taken their RMD earlier in the year, the CARES Act allowed for them to be rolled back into the account by replacing the 60-day rollover requirement with a fixed date of August 31, 2020.
Considerations for Retirees
What are your cash needs for the year? If they’re satisfied by current income and access to taxable accounts you may consider holding off on your 2020 RMD, or even a possible Roth conversion in its place. Make sure to reach out to your advisor or financial institution to ensure it’s not processed.
If your RMD was taken and has not yet been “rolled back” you’ll find it’s too late to act. However, use it as an opportunity to meet with your current Financial Advisor to ensure that there is sufficient understanding of your cash needs, priorities, and goals in the future.
RMDs Pushed Back to Age 72
For individuals born after July 1, 1949, the SECURE Act will delay the age at which RMDs begin from age 70 ½ to 72. This is a welcome change, and isn’t that surprising given that Americans are working longer and longer before considering retirement.
Considerations for Retirees
How does this affect your financial plan and future/current spend down strategy? Projecting future cash flow will allow an individual or advisor to properly manage the distributions from a portfolio. In some cases, an individual’s cash needs will be far outpaced by future cash flow. If you’re using a Roth conversion strategy to help address this, you may find that it makes sense to continue over this additional year. Ultimately, we gain flexibility.
Elimination of The Stretch IRA
Prior to January 1, 2020, non-spousal beneficiaries of tax-deferred retirement accounts were able to spread RMDs over their lifetime, effectively allowing them to limit income in any given year by spreading out the large tax burden of the IRA. However, with the passing of the SECURE Act, some beneficiaries may find that their Inherited IRAs must now be distributed in their entirety within 10 years. This can cause a large increase in taxable income, especially if the beneficiary is still working and in the higher earning years of their life.
Considerations for Retirees
How does this impact your beneficiaries and any estate planning in place? If leaving money behind to heirs is a priority, how we leave money behind should be, too. Given the provisions in the SECURE Act, it may make even more sense to get money out of tax deferred accounts, or emphasize growth in other accounts with more favorable tax properties
Also, while its already advisable to meet with your estate attorney every so often, it may be even more pertinent if you have a trust as the beneficiary of your IRA. In any legal document wording is important, and the new rules could alter the very purpose of the trust. This can be especially significant when language limits distributions to required distributions, or RMDs. The only year a distribution is actually required under the new law is in year 10, at which point the entire balance of the IRA would distribute.
The financial landscape is constantly changing, and we rely on our advisors to guide us through it. The Claris team stays on top of evolving legislation and how it impacts our clients’ investment goals. Contact a Claris advisor to Understand Invest and Relax.
