New tax law gives for some, takes for others

IRA restrictions loosened for some while `stretch' goes away

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For those of us in the flyover states, Congress seems locked in discord and matters that don’t seem to move legislation. But don’t kid yourself - sometimes we would like for the lawmakers to leave laws in place, rather than acting to modify them.

Such is the case with the Setting Every Community Up for Retirement Enhancement (SECURE) Act (sometimes, you have to wonder how much time is expended just coming up with the name). And as is the case with all legislation, there is both good and bad, winners and losers, depending on where you may fall under the new provisions.

For those of us who are over age 70 and are continuing to participate in this go-go economy, there are a few provisions in the SECURE Act to please us. And you should make yourself aware of them as you begin to prepare your 2019 tax return and strategize for 2020.

First, after tax year 2019, we can continue to fund an Individual Retirement Account IF we have earned income from wages or self-employment or if we receive taxable alimony after attaining age 70½. Under the previous law, this kind of post-70½ IRA funding was not allowed. And no, you cannot leverage un-earned income — like pensions, interest, dividends, or capital gains — to create deductible payments into an IRA at any age.

Again, for those of us in the “OK, Boomer” crowd, if you were not age 70½ by the end of 2019, you get an extra period of time - to age 72, to be precise - before you must withdraw from your accumulated retirement accounts like IRAs, SEPs, SIMPLES, and 401(k)s. That delay on the withdrawal can mean an extra 18 months of deferred income and an extra 18 months of growth and earnings inside of those retirement accounts.

But now, consider perhaps the least-liked provision of the SECURE Act - the partial elimination of the “stretch” IRA.

As I noted earlier, we reach an age (now 72) where the law says we can no longer defer our retirement income, where we must begin taking those pesky Required Minimum Distributions (RMDs). There are tables based upon our ages and our retirement accounts’ named beneficiaries which tell us when we reach that golden age what the RMD is for a given year. At age 72, we are required to take approximately 3.8 percent of the accumulated retirement accounts. If you have accumulated, say, $1 million in your retirement accounts and you attain age 72, your RMD for year one would be approximately $38,000.

But what if your retirement account is actually making 8% internally? Well, while you are mandated to make the minimum distribution, you are not required to take all of the accumulations in your retirement account out during your lifetime. This phenomenon is the “stretch” feature that we mentioned. It is possible that on your death, you could have an even larger balance in the retirement accounts than you did when you became age 72. What a great opportunity to leave an on-going income stream to your children or your grandchildren! Like the loaves and fishes, your accumulated retirement accounts could continue to provide benefits to your heirs!

With certain exceptions, the above-described “stretch” of retirement benefits has been substantially curtailed by the SECURE Act. With notable exceptions, the accumulated retirement accounts must now be paid out over no more than a 10-year period.

There is a Jewish saying that “Man plans and God laughs.” If we all remember that tax law is written in pencil when we make our plans, it will be easier to adjust in the face of unfavorable laws.

Fran Coet is a partner of ATLAS CPAs and Advisors in Westminster, www.AtlasCPAs.com on the internet or call 303-426-6444.

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