Earlier this year the U.S. House of Representatives passed a bill to change many rules about retirement accounts, such as Individual Retirement Accounts (IRAs). But the bill stalled in the Senate. The support in Washington was overwhelming, so it was just a matter of time before it would pass. And the time has come. The changes are here! So let’s explore the changes.
Required Minimum Distributions (RMDs) Not Required Until Age 72.
For many years, the law required a retirement account owner to begin taking minimum distributions by age 70 ½. Otherwise, severe penalties would apply.
Under the new law, an account owner can delay minimum distributions until age 72. This will allow those who do not need distributions to keep their retirement accounts intact longer. As a result, retirees will enjoy larger retirement accounts during retirement and higher balances may remain at the owner’s death. This potential for larger retirement accounts at death is offset by another provision in the law.
Mandatory Withdrawal of Inherited Retirement Account: 10-Year Rule
The law has allowed the owner of an inherited retirement account to take distributions from the account over the life expectancy of the beneficiary. Beneficiaries are usually much younger than the previous owner. So this allowed the payout of the retirement account to stretch over a long period of time.
The new law requires the owner of an inherited retirement account to withdraw the full balance of the retirement account within 10 years of inheriting it. The effect of this change could be huge. Although there are a few exceptions to the 10-year distribution requirement, they are narrow.
The changes will force the complete distribution of the account over a shorter span than under prior law. This means taxes on the retirement account distributions will be paid sooner, and the taxes will be higher. Everyone with retirement accounts should review their estate planning to determine how the changes will affect them personally.
What Should You Do?
The best way to protect yourself from surprises and higher taxes is to be proactive. Evaluate your retirement accounts and your estate planning soon. Determine how the new laws will affect you and your family. Then, make changes to your estate planning for better protection and lower taxes. If you’re not sure how to get started, get your Estate Planning/Elder Law Attorney, financial advisor, and accountant involved. Estate Planning/Elder Law attorneys, like me, along with your financial advisor and accountant are your financial team. We are here to help you each step of the way. Contact us so we can help you. And let your friends know we are here to help them, too.