True or False? “It is mathematically impossible for an IRA account owner to have his first required minimum distribution (RMD) be due for the year 2020.”Here’s why this statement is true.First, we are not talking about inherited IRAs. If the account owner died in 2019, then the first RMD for the beneficiary needs to be taken by December 31, 2020. Inherited IRAs do not fit this statement.Next, we are not talking about workplace retirement plans – like a 401(k). The reason this statement does not apply to a 401(k) is because of the pesky “still-working” exception. If a plan has the still-working exception feature and an older employee separates from service in calendar year 2020, then the first RMD will also be due for 2020.
Who can offer them? Most company retirement savings plans, such as 401(k), 403(b) and 457(b) plans, are allowed to (but not required to) offer plan loans. Loans are not allowed from IRAs or SEP and SIMPLE-IRA plans.What is the maximum amount I can borrow? Plan loans are generally limited to the lesser of 50% of your vested account balance, or $50,000. Your employer can allow an exception to this rule: If 50% of your vested account balance is less than $10,000, you can still borrow up to $10,000.Example 1: Justin participates in a 401(k) plan that allows plan loans. Justin’s vested account balance is $16,000. If his plan doesn’t allow the exception, the most Justin can borrow is $8,000. If the plan allows the exception, he can borrow up to $10,000.
Question:Looking for your help. Husband has an inherited IRA (from his dad prior to the SECURE Act) and was taking RMDs using the single life table. Husband passes away in 2020 and leaves the inherited IRA to his wife who is age 65. What are the wife’s options for distribution?Thanks,TravisAnswer:Travis,Under the SECURE Act, if a beneficiary owner of an inherited IRA dies in 2020 (or later), the next beneficiary in line (the successor beneficiary) is bound by the 10-year payout rule. Even if the successor beneficiary would otherwise be allowed to stretch payments as an eligible designated beneficiary (i.e., spouse, disabled individual, etc.), that person is still saddled with the 10-year rule.
The SECURE Act overhauled the rules for beneficiaries of retirement accounts. One significant change it brought is the new 10-year payout rule. Here are ten things you need to know about the new 10-year rule.1. The 10-year rule applies to most nonspouse beneficiaries when the account owner dies in 2020 or later. The bottom line with the SECURE Act is that very few nonspouse beneficiaries will escape the 10-year rule. While the new law does carve out some exceptions such as disabled or chronically ill individuals, most beneficiaries who used to be able to stretch out distributions over their lifetime will end up with the 10-year rule.
A spouse beneficiary of an IRA faces many decisions. There is great flexibility and many items to consider. For example, how old was my spouse when he or she passed and what impact will that have on my available choices? Do I need money now? How can I minimize my tax burden? Will penalties apply if I withdraw from the account? By systematically considering each question and leveraging the rules, a spouse beneficiary can create a unique plan that fits his or her needs. After all, with the loss of a spouse, the last thing anyone wants to deal with is money problems derived from poor planning.Example 1: Married couple John and Janet are both 55 years old. John dies and leaves his traditional IRA to Janet. Janet will need immediate access to the account to cover living expenses. Based on these facts, the decision is clear.
Question:For the last three years, I have done a back door Roth conversion. I do the conversion in January.I am 68 years old and I am rolling over my 457(b) New York City deferred compensation plan funds to a rollover IRA with Vanguard. They will get the money around April 1, 2020. Will there be a tax penalty for the 2020 Roth conversion?Answer:When you do a back door Roth conversion, the pro-rata rule applies if you have pre-tax funds in any of your IRAs. In that case, a portion of your conversion will be considered taxable based on the ratio of your pre-tax IRA funds to the sum of all of your IRA funds.
Most workplace retirement plans allowing elective deferrals fall into one of these varieties:401(k) plans for employees of private sector companies.
403(b) plans for employees of tax-exempt employers, public schools and churches.
457(b) plans for employees of state and local governments.
Although many of the tax rules governing these types of plans are the same, there are some important differences. (This article doesn’t cover the Thrift Savings Plan, for federal government workers and the military, or 457(b) “top-hat” plans for employees of tax-exempt employers.)
Many IRA owners have named trusts as their IRA beneficiaries. You may be one. Trusts offer control from the grave and can be a smart choice, especially to protect beneficiaries who may be minors, have special needs or simply are not good with money. Naming a trust as an IRA beneficiary has always had its problems. The rules are complicated and having a trust drafted and administered can come with a hefty price tag. The ability to stretch RMDs over a trust beneficiary’s lifetime, however, was often enough to outweigh the negatives. The SECURE Act changes this equation.Enter the SECURE ActUnder the SECURE Act, most beneficiaries will no longer get the stretch. Instead, most beneficiaries, including trusts, will be subject to a 10-year payout rule. That means all the funds in the inherited IRA must be paid out either to the trust or the trust beneficiaries within 10-years.
Question:Can a QCD be used to pay dues to a charitable organization?Answer:This is an area where we receive a lot of questions. To qualify as a QCD, there cannot be any benefit back to you from the funds that go from your IRA to the charity. Paying dues required for membership would be a benefit back to you and as such would not qualify as a QCD.Question:
Do you want to access your IRA funds penalty-free, even though you are under age 59 ½ and no exception fits your situation? It can be done. Starting a new business and need capital from your IRA, but don’t want to pay the 10% early withdrawal penalty? There is a workaround. Lost your job and require funds to cover your mortgage and cell phone bill, but the only bucket of cash you have is your IRA? There is a pathway to the gold, but it is fraught with danger.Like Indiana Jones sprinting through spiderwebs and dodging poison-tipped darts while leaping bottomless pits, the giant 72(t) boulder will roll fast at your heels. One misstep could result in crushing disaster. However, if it is the golden idol in the rear of the IRA cave you seek, there is a way.The general idea of a 72(t) schedule (or a “series of substantially equal periodic payments”) is to open the door to an IRA before 59½ without a 10% penalty.
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