Congress passed major changes regarding distributions from 401k plans and IRAs effective in 2020. The changes do not apply to pension plans. Meet with your attorney for further explanation on how these may affect your estate planning.
When must I take money out of my IRA or 401k?
The existing rule provided that in the year you turned 70 ½, you must begin taking your minimum distributions from traditional IRA and/or 401k plan with certain exceptions. (This is the tax law, so of course, there are always exceptions.) The new rule changes the date to age 72. If you turned 70-1/2 in 2019 or earlier you covered by the old law. There are no required distributions for your Roth IRA. Going forward, as long as you did not turn age 70-1/2 by 2019 or earlier, you are eligible for the age 72 rule.
How long can I contribute to an IRA?
Congress has eliminated the age restriction on deductible contributions to an IRA, so you can continue to make deductible contributions to an IRA after age 70-1/2 as long as you have wages or self-employment earnings.
Can I still leave my IRA or 401 k to my children?
Under the old law, if a child or grandchild inherited your IRA, they could take minimum annual distributions based upon their life expectancy rather than yours. This allowed decades of income tax-deferred (or income tax-free if a Roth) distributions from the IRA.
Under the new law, distributions have to pay out over a period no longer than 10 years beginning the year after your death. You can pay it out during the 10-year period or wait until the 10th year. There are exceptions for a spouse, minor children (not grandchildren), a disabled person, a chronically ill individual, a person with special needs, or a person who is no more than 10 years younger than you.
Will this change in IRAs impact my estate planning?
It might. If your primary beneficiary is your spouse, there is no change since your spouse can roll the IRA over income tax-free into his or her own IRA and take the funds out over his or her life expectancy.
However, if you leave funds to a child or grandchild or a trust for the benefit of a child or grandchild then the 10-year rule applies except as described above. The problem is you might have already set up a trust for the benefit of a child or grandchild that might have been designed to take advantage of the long payout over the old rule.
Under the old rule, you could protect the IRA from a financially immature child or grandchild and keep the funds in the family and protected from in-laws, what we call a Bloodline Trust. Under most trusts, the IRA must pay out over the mandatory payout rate. So rather than have the trust hold a major asset in a protected trust for decades, under the new law the trust has to pay out the entire IRA by no later than 10 years.
Michael Solomon is a partner with Solomon, Steiner & Peck, LTD in Mayfield Heights. To see a complete Q & A on this topic, email him at [email protected], go to the website ssandplaw.com or call 216-765-0123.
