Backdoor Roth IRA: Have you heard of it?
Backdoor Roth IRA: Have you heard of it? Ever heard of a backdoor Roth IRA? Or for that matter, have you ever heard of a MEGA backdoor Roth IRA? How…
February 10th, 2020
Tom takes a look at some IRA changes that came out of the new SECURE Act signed back in December 2019. Give it a watch or if you prefer to read, check out the full video transcript below.
by Tom O’Saben, EA
So here’s the situation. For tax years after December 31, 2019: if an individual is over age 70 1/2 and still working, they can continue to contribute to traditional IRAs. That’s going to put IRAs more in line with traditional pension plans. So for example, if you’ve got someone who’s 90 years old, and they’re still working, and they’ve got a 401k plan at work, they’ve been able to contribute to the 401k plan,but up until now, they couldn’t contribute to a traditional IRA after they turned age 70 1/2. The new law says for tax years beginning after 2019, those individuals over the age of 70 1/2 (and they’re still working) can in fact contribute to a traditional IRA. Now, along with the SECURE Act that the President signed back in December, we’ve got a change in RMD years. No more will we have April 1 of the year after you turn age 70 1/2. We will for those tax payers who turn 70 1/2 by December 31, 2019. We had a getting ready for filing season webinar we did in late January and I talked about the last person to be impacted was an individual who was born June 30, 1949. That individual would have been 70 1/2 on December 30, 2019.
So, let’s get the RMD rules in place. Let’s understand those as you’re doing planning with your clients during tax season. If they’re already at least age 70 1/2 by the end of the year, they’ve got the old rules. So someone who’s 72..74..75 years old right now, they’re not going to be able to stop their RMDs, they’re going to have to continue them. The other rule I just talked about, if they’re still working, they can be putting money in their IRAs, a traditional IRA, because they’re still working, that rule changed, but their RMDs are still going to be based on age 70 1/2. So the new rule under the SECURE Act says the new required minimum distribution age is age 72, for those individuals who are more than 70 1/2 after December 31, 2019. So you have someone who’s 65 or 68 or 69; now they’re not going to have to start RMDs until they turn age 72. So I get the clarity of the law is for those people who maybe were 70 1/2 last year, could they have started, stop and then start again? The answer is no. But the individuals who aren’t yet at 70 1/2 won’t have to start until age 72. That law is in effect for people over age 70 1/2 as of 1/1/2020. So that’s going to be some important planning that you’re going to have with clients.
The third point that I want to make out of the IRA changes of the SECURE Act deals with qualified charitable distributions. Now, we’ve been using those especially the TCJA years, for individuals who are in their RMD years, also contribute money to charities. So we find that we have to take money out of the IRA, and we give money to charities. So can we kill two birds with one stone? The answer is yes. The owner of the IRA instructs the trustee to send money from my traditional IRA to the qualified charity. What happens? Well, first of all, it counts towards what they have to do for RMD. Remember if they were 70 1/2 or older, as of December 31, 2019, they’re under the 70 1/2 rules. So we got that…we have to take money out of out of RMD. So they direct it from the IRA directly to the qualified charity, it counts for their RMD. It’s not included in income. But in return for that we can’t take a charitable deduction and with the with the new higher standard deductions under the Tax Cuts & Jobs Act, they may not have benefited anyway. So keep that in mind. Now, here’s the wrinkle that came out of the SECURE Act. So I just mentioned earlier – again, this is from a planning standpoint- that under the SECURE Act, we can continue to contribute to traditional IRAs, beyond age 70 1/2, if we’re still working. That being said, we are also going to be required to take minimum distributions. So you can have a situation where you’ve got a, let’s go down the road, you’ve got somebody who’s 75 years old, they’re contributing to an IRA, and they’re also taking RMDs. Here’s the wrinkle that comes out of the SECURE Act: if they’re going to use a qualified charitable distribution, they have to reduce the amount of that qualified charitable distribution by any deductible IRA contributions that they were able to make after December 31, 2019. And that might make sense because that’s kind of a double dip. So we want to keep that in mind as well. So we can make the IRA contributions beyond age 70 1/2 if we’re still working. If our client is under age 70 1/2 as of the end of 2019, they don’t have to start with their RMDs until they turn age 72. And if they’re going to make a qualified charitable distribution from an IRA, if they’ve made deductible IRA contributions after December 31, 2019, and they’re over age 70 1/2, will have to reduce the amount available to do a QCD, by the amount that they were able to deduct. Makes sense. One more point I want to make in the area of IRA changes, and that’s dealing with stretch IRAs. For individuals who pass away after December 31, 2019: we’re talking about inherited IRAs. For inherited IRAs, unless you are what’s called an eligible designated beneficiary, which would be a spouse, a minor child, someone who’s disabled, basically the answer is this: You’re only going to be able to stretch that IRA out to 10 years. You’re not going to be able to do it over your life expectancy. Yes, a spouse can. Yes, a minor child can. Yes, a disabled beneficiary may follow the old rules. But for new rules, you’re an adult son inheriting mom’s IRA when she passed away in 2020. The longest you’re going to be able to delay distribution is 10 years.
What we find that these these little tidbits coming out of acts that were passed last year to be useful. We’re hoping to make them quick hits so you can spend just less than 10 minutes listening to me pontificate and maybe that’ll help you in planning with your clients during this very, very busy time of year. All the best and don’t forget about yourself. Tom O’Saben saying adios for just a little bit.
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