Episode 8: Clearing Up Confusion On IRA Changes!

WMT (ep8)
Isaac Wright: Well, glad to have you here at Wright Money Tips. I’m Isaac Wright. For today’s episode, I really want to talk about the fact that I think many of you have been inundated with information relative to the amount of legislative changes that have taken place when it comes to your finances and specifically over the last couple of years, for those of you here that are in retirement or nearing retirement, may be at the point where you’re old enough, where you have to take, what’s called minimum distributions. A lot of changes have taken place, and there’s been some confusion about what you can and what you can’t do. So today we’re going to just break this down pretty simply on two topics that you need to be aware of, let’s say confusing factors toward your IRAs, your retirement accounts. I have a great guest today, Mr. Kevin Buenvenida. Kevin here is one of our lead advisors at Financial Dynamics & Associates, and also someone who runs up into this pretty much every week here at our firm, so glad to have you, Kevin,
Kevin Buenvenida: Thank you very much.
Isaac Wright: So, let’s go ahead and talk a little bit about this. When I say today, two topics, we’re going to jump into the first one here to clear up some of the confusion around what’s called Required Minimum Distributions. Now for the listeners today, this is not going to apply to everybody. But for those that typically up to and through 2019, when they turned 70 and a half, the government requires you to take money from a combination of all the money that you’ve been growing, tax deferred in qualified plans.
Now there are some caveats to that, but for the general rules of today that we’re going to talk about, when you turn to 70 and a half, you would have to take money out of your retirement accounts, whether you need the money or not, you had to take that money and pay a tax on it. Well, last year in 2020, the government said if you’re at the required minimum distribution age, which conveniently changed to 72, they stepped back and said, “Hey, we’re in such an economic turmoil situation, you don’t have to take the required minimum distributions.”
But now here we are in 2021. So, I think that sets the stage really well. So for this year for 2021, we’re still here in the front half of the year. Let’s talk about what really is going on in terms of the rules around minimum distribution so there is no confusion. So, let’s start with the fact of what is the required minimum distribution age.
Kevin Buenvenida: So as of December 31st, 2019, as Isaac mentioned, the rules have changed just by a little bit. 72 is going to be the new required beginning date age for an investor who owns an IRA qualified account, like a 401(k), to start taking money out of that account. Now just a quick heads-up here, as Isaac mentioned, even though you might not need the funds per se, you have to take the money out.
Uncle Sam hits you with a 50% penalty on that amount, if you don’t take out that money. So, we got a rule to play by here where required minimum distribution is literally required.
Isaac Wright: I just want to make sure people understand that if you don’t take your required minimum distribution now at age 72, if you turn 72 at any point during the year, you’re looking at a 50% penalty on that amount. Now, granted, you can play Russian Roulette, I guess and if you don’t get audited, maybe you don’t have to pay that tax, but I wouldn’t want to be that person. The other thing here, Kevin, interestingly with the rule change from 70 and a half to 72 there’s been some confusion on the amount that you have to take for your required minimum distribution, because there’s a new table coming out and that’s already out there. If you do some research, some people go and especially if they’re a do it yourself or they’re figuring out, “Well, what table should I use?” Let’s clarify that as well.
Kevin Buenvenida: So, there are new tables coming out that are revolving around life expectancy, which help calculate what the requirement of distribution is for a given year. A short answer here is the older that you get, the more amount that you’re supposed to take out every single year.
The new tables though, however, as you might run across on the Internet, don’t go into effect until 2022. So, be very cautious about seeing new tables on the Internet and assuming that your factor or the amount that you’re supposed to take out of a qualified account are going to be substantial or different. Worthy enough of asking a professional advisor, tax consultant, individuals like Isaac and myself, about what your required distribution might be given this potential change that we’re going to see down the pipe.
Isaac Wright: Yeah, because the new tables now really are taking into consideration that people are living longer. So, the amount that they have to take is going to be a little bit less, but the problem is that they use that table for 2021. Then you’re going to get right back to the fact that you got to pay a 50% penalty, maybe because you didn’t take out enough money to begin with.
So again, welcome to the world of trying to eliminate some of that confusion. Turning 72, let’s say you get to the age this year, where you turn 72. So again, if you’re 70 and a half this year, you’re off the hook and you don’t have to take any money out. But it’s 72, if you turn 72, there is one little nice benefit if you will, especially if you’re still working, about when you can potentially take your first minimum distribution. Kevin let’s fill the listeners and the viewers in on that rule.
Kevin Buenvenida: Yeah, absolutely. So, you’re required to take out your first required minimum distribution by April 1st of the following year that you turn 72.
Now you might be in a unique situation where you’re still working at age 72. There is the possibility for you to continue to push off that first required minimum distribution. But a caveat here is that you check with your plan provider or the employer sponsored plan to see if that rule applies to you.
You don’t want to be surprised again where you thought you’re still working and thinking that you can defer that first required minimum distribution, but you do owe one.
Isaac Wright: Also, if you are going to be in a position where you’re working, you’re bringing in a more robust amount of income and you know, the following year, maybe the year you turn 73, you’re not going to be working as much, you may be in a different tax bracket and it would behoove you to take not just the minimum distribution that you could have taken at 72 that you pushed to April 1st of the year you turn 73. That year, you are going to be required to take out two minimum distributions.
So, the year that you turned 72, that you should have taken, or maybe let’s call it that you have the option to take, if you defer that, the government’s not going to let you continuously defer that. So you’re going to be in a position where you’re going to have to take two distributions; two minimum distributions at age 73 for that year.
But anyway, I want people to realize even with what we’re covering here today and trying to be as straightforward as possible, there are definitely, as you can see, some caveats and people are getting confused.
I just want to break out of this for a minute, Kevin. We’ve had people that we’ve talked to this year that feel like it’s still 2020, whether or not they have to even take their minimum distribution. Some crazy, just, I won’t say ideas, but just the fact that what they came through in 2020, they’re confused about the options, the availability, really the rules towards those minimum distributions.
Now, let me stop here for a minute. Everything we’re talking about here has been pushed to 72, but there is one very big part of the minimum distribution rules that did not change and still kept it at 70 and a half, which can be a very large benefit for people that are charitably inclined.
Let me step back and let me just let you run the show with that because that’s another area where people are just an uncertain of what to do.
Kevin Buenvenida: So, the concept that Isaac is talking about is the qualified charitable distribution and the breakdown between the disconnect with this age 72 for the first required minimum distribution is a little bit different when you can start a qualified charitable distribution and that is age at 70 and a half. So, a little bit of a difference in that age, but basically with a qualified charitable distribution, if you’re charitably inclined, you’re giving money to a qualified charity, 501 c3 organization, and you’re giving it to the charity from what’s a qualified account, an IRA or 401(k), you can give up to $100,000 from that account, or excuse me for that taxpayer, not pay any taxes on the distribution, and the money goes directly to the charity.
Now, if your required minimum distribution age, you’re 72 or 73, and the government’s making you take out money, and let’s say in combination, you’re going to give money to the charity anyways, you can use a qualified charitable distribution to satisfy not just the required minimum distribution, but also that charitable gift that you’re going to give.
So real unique to see that money’s being forced to be taken out of an account at age 72, but you could start this beneficial strategy for a charity or an organization at 70 and a half.
Isaac Wright: So, for all of you today, before we move on to what I call the key second change. Number one is we wanted to make sure that you understand what the minimum distribution rules are.
If you have any concerns, questions, obviously we can be of your assistance. But just be careful with what you Google, what you research, because people are pulling articles from 2020, thinking that they apply to 2021 because they don’t look at the date of the article. So, let’s go ahead and move on here, Kevin.
So, topic two, let’s call it key change. Number two for IRAs is inherited IRAs. Now whether it’s an inherited IRA an inherited Roth IRA, overall, when I say the word IRA, I’m kind of talking about any money that you’ve grown in a qualified plan tax deferred. The new rules of the game, now officially, is you have 10 years under most circumstances that you have to empty the account, if you are the benefactor of that IRA.
So, if you’re in a position where you inherit an IRA, you have 10 years now to basically empty that account. So, Kevin, when we talk about this, because the old rule was, you could take that money and defer it and take small portions of it over your life expectancy, which could be 20, 30, 40 years, now that’s been compressed down to 10.
There are still a few little caveats, like I said earlier that allow people to still not have to abide by the 10-year rule. But let’s just start here for a minute. What are your thoughts around this? What is probably, let’s call it the leading factor, the first thing you want to cover when you heard about and know about this rule for the FA families we serve?
Kevin Buenvenida: Sure, absolutely. So, this is like going to be a large change, not just for the lifetime of the original IRA enter, but as we think about gifting money to our loved ones, our significant spouses, charities even, it does start to affect our plans as to how to efficiently do that not just from a longevity standpoint, but also from a tax planning standpoint. Now, the strategy that Isaac was mentioning prior to the rule changes is called the stretch IRA. Under most cases and inheritors mean a beneficiary could inherit a qualified account, like an IRA, stretch it out over their lifetime, small payments have a required minimum distribution every year. Going forward now, in most situations, the beneficiary will have to deplete that account within 10 years now because there’s a tax consideration for those distributions. Again, money coming out of a qualified account, get taxed at ordinary income tax rates.
One should be mindful or at least have a conversation with an advisor, or maybe a tax professional, about strategies revolving around how to efficiently take out the money and satisfy that real requirement within that 10-year period.
Isaac Wright: Like I said before, you know, the old rule was 70 and a half for Required Minimum Distributions. Well, this 10-year rule, if you inherit money from a retirement plan, let’s say if you had a death of that individual that gave you the money prior to December 31st of 2019, you could still play by the old rules. You know, that’s another confusing factor. People go on the Internet, they Google a term, they see stretch IRA, I can take this money out over 20, 30 years. And again, they’re not looking at the date of the article. So, for all of you listening to me today, pay careful attention. If you are going to use Google, if you’re going to try to do things on your own, it’s a minefield that can cause you significant pain if you do things incorrectly.
But I think to, Kevin, after the 2020 tax year now is for 2021, it’s now solidified obviously with this 10-year rule. But with this 10-year rule, unlike money that had to come out systematically over a longer period of time, the new rule of 10 years, you don’t have to take any money out until literally the 10th year.
So, you have some flexibility about what your tax situation looks like, how you feel about taxes and again, whether or not you need the money now or in the future. For example, like if you inherit a Roth IRA, many people want that money to grow tax free as long as they can. So, from that standpoint, maybe wait until the end of the 10th year before you lump sum out tax-free money, because once it’s out, then obviously any growth after that is not going to play by the same rules. I mean, these are all just little caveats.
Kevin Buenvenida: Absolutely. And to the opposite point there, if you’re dealing with a traditional account, traditional IRA or 401(k), you may not want to wait until the very last minute to take a large distribution, which you’re going to get hit at your ordinary income tax rates.
So again, I think a strategy or maybe being conscious about the way you take out and how you take out the money would be a better approach than just assuming the information that you read on the Internet to be true.
Isaac Wright: Well, the last thing I want to say, and this has been great by the way, the last thing I want to say is this is also just check your beneficiaries for the money that you’ve accumulated in your retirement accounts.
Most of you listening today, your IRAs, your qualified plans that you worked hard for for 20, 30 plus years is probably a majority of most people’s nest egg. Sometimes the beneficiaries are incorrect or maybe monies are going to people that they did not anticipate it would go to because of life changes and they forget to go back and check the beneficiary.
So for all of you today, that’s another thing that we do here at our firm on an annual basis is to make sure that’s one of our checkpoints is, are the beneficiaries correct? Guys, listen to me, this has nothing to do with, about buying the next hot stock. This is about how much money you want to go out to the people that you love and have it done correctly. You know, Kevin.
So, with that, let me just step back here with everything that we cover, not only in the program, but here at our firm. I think we’re starting to see more confusion around the amount of rules, all of you have seen, the multiple and different types of COVID relief bills, all these rule changes and all of the above.
I’m trying to get back to the basics of what really is out there today, but you have to pay attention to. Kevin before we wrap up. Anything else you want to share with the crowd?
Kevin Buenvenida: I think big picture wise, obviously, we think about retirement, it is a process that does not end the moment that you stop working.
And it’s not just about investing or as, as you mentioned, picking the next hot stock, that’s going to grow or explode in value. It’s about the efficiencies and thinking about your long-term needs, wants, and wishes, and making sure if you need, you have a professional to help guide you through, or at least avoid some of those pitfalls or the minefields, like being mindful of the taxation in certain situations with your retirement accounts.
Isaac Wright: If you have any concerns or questions you can visit wrightmoneytips.com to request some time on our calendar, or please subscribe when visiting wrightmoneytips.com to receive notifications on new episodes, our newsletter and even upcoming events.
Well, Kevin, I think this has been a great conversation. And for all of you today, if you’ve listened to what I’ve had to say, please don’t let Google be the Yoda at the top of the mountain. It’s not the end all be all. You need to have somebody that knows who you are that wants to develop a relationship and be in a good spot. Whether or not it’s going to be an IRA or any other topic that they know the situation behind the scenes of what you’re after.
I’m Isaac Wright. Thank you for joining us at Wright Money Tips. And we’ll talk to you soon.