An Early Christmas Present from the IRS
By Mike Hoffman, Esq., CPA
Last year taxpayers received a little coal in their stockings. The SECURE Act that went into effect January 1, 2020 eliminated the “stretch IRA” which had allowed non-spousal beneficiaries to withdraw assets from an inherited IRA over their life expectancies. The Secure Act imposed a ten-year rule for inherited IRAs.
This threw a ringer into many taxpayers’ financial and estate planning. For instance, the taxpayer’s vision might have been to leave substantial traditional IRA assets to children, which would supplement their lifestyle for the remainder of their lives, and leave Roth IRA assets to grandchildren, which have no minimum distribution requirements and account balances could continue to grow tax free (deferred).
Of course, the ten-year rule practically means that the IRS gets their tax dollars sooner, and the tax free (deferred) build up within an IRA must cease ten years after the owner’s death. Darn!
We did get a little sugar in our stockings for this year. In August 2018, President Trump issued an executive order directing the IRS to review life expectancy and distribution tables to determine if they should reflect current mortality data. On November 6, 2020 the IRS released updated tables which are more favorable to taxpayers. For instance, a 72 year-old IRA owner will be using a life expectancy of 27.4 years to calculate her required minimum distributions. The prior tables would have required 25.6 years. Remember, the Secure Act pushed back the age at which required minimum distributions started, from 70.5 to 72, and allows traditional IRA owners to keep making contributions indefinitely.
For those bean counters out there, if your IRA balances grow at approximately 9% per year, using the new life expectancy table will allow your account balances to grow (keep going up in value!), even though required minimum distributions are withdrawn every year, until the age 92. Of course, your required minimum distributions also grow, doubling approximately every 8 years until you are age 90.
Keep socking away those retirement dollars. Merry Christmas and Happy Holidays!
