Question: Do you know anything about the Required Minimum Distribution changing for my IRA?
Answer: I want to say this column is not meant to give financial advice, but I have learned a lot about RMD’s and IRA’s in the last few weeks. I will try to pass along what I have learned.
When preparing for retirement, we are trying to save and set aside money for this period of their lives. This process often includes setting up an Individual Retirement Account (IRA). A traditional IRA contribution is pre-tax money set aside in the IRA for later use. This means that the money placed in the IRA has not been taxed prior to the deposit going in. The money is taxable when it is taken out of the IRA.
This process usually provides beneficial tax savings to individuals, couples and families in what are anticipated as the peak earning years. Once an individual reaches retirement age, they may begin to withdrawal this money to support themselves, as they are no longer working. Many people expect that once they are not going to work, their income will be lower and therefore their tax liability will be lower. In practice many individuals have found that they are earning more than they expected in retirement and are now paying taxes on all the income they receive. The IRA distributions are taxable, Social Security is partially taxable, and pensions are taxable income. So retirees find they are paying income tax on almost all of their income sources.
This is why many individuals postpone taking out of their IRA’s until later in life, to ensure they have enough for their retirement and to reduce their taxable income for as long as possible. This has historically been allowable until the age of 70.5 years. At 70.5 years there are Required Minimum Distributions (RMD’s).
The SECURE Act changed the rules for RMD’s and other aspects of retirement. As of 1-1-2020, this law allows individuals who have not yet reached 70.5 years to postpone taking their RMD’s until they are 72 years of age. That for some could postpone the higher income and the higher tax bills.
It is important to note that for individuals who are already 70.5, the RMD rules do not change. It is only those individuals who have not reached the age of 70.5 years as of 1-1-2020.
The Secure Act has many other changes to the rules relating to IRA’s. Another significant change is the amount of time that beneficiaries have to distribute inherited IRA’s. As of 1-1-2020 most inherited IRA’s must be distributed within 10 years of the account owner passing away, this does not include IRA’s inherited by a spouse and a few other exceptions. For example, an inherited IRA has $200,000 in the account, (it must be depleted within 10 years), therefore about $20,000 per year must be removed to meet that timeline. That sounds wonderful, but if working with your own income, this increases the taxable income significantly. Prior to this law change, individuals could postpone collecting income from that IRA until ready for retirement.
The Secure Act includes changes that allows those individuals who are working past 70.5 can continue to contribute to an IRA. This could be a useful strategy for individuals who have continued to work. A Roth IRA, is an alternative means of saving for retirement. A Roth IRA contributions are after tax income, and therefore when you take distributions later, you do not pay income tax on what is distributed to you. The Roth IRA vs. a Traditional IRA impacts your finances very differently. It does, however come with its own stipulations, such as income caps on who can contribute.
There are a lot of rules and stipulations as with any regulation, so it is something I would encourage you speak to a professional about. I always recommend working with a tax professional or financial planner to make the best possible decision for you and your family.
Senior Life Matters is a community based program sponsored by Lutheran Jamestown. For questions and concerns or to reach Janell Sluga, GCMC, call us at 716-720-9797 or e-mail at firstname.lastname@example.org.