Through December, 2019, all those who had passed away having “ never-taxed” retirement money as part of their legacy, had the opportunity to STRETCH or spread the distributions and tax consequences over the life of the named Beneficiary. By way of example:
- Mary Jones , a widow age 75, has one child, Christine, whom Mary wants to have all her assets at death. Mary has $500,000 in her traditional Individual Retirement Account.
- Christine is age 45 and has a remaining life expectancy of 40 years ( assume her actuarial life would end at age 85 ).
- If Mary had died prior to January 1, 2020, Christine ( Mary’s named beneficiary ) could have taken even distributions within the hypothetical 40 years. Exclusive of IRA earnings, Christine could take even distributions of $12,500 per year as additional taxable income.
- If Mary died AFTER December 31, 2019, the new SECURE ACT, would limit Christine’s options to taking the money whenever Christine saw fit as long as it was within a TEN ( 10 ) YEAR PERIOD. Exclusive of IRA earnings, Christine would be taxes on an additional $50,000 per year as additional taxable income.
- A Beneficiary ( like Christine ) could be exempted from this accelerated taxation of retirement ( qualified ) money in either of the following situations:
- Beneficiary is the spouse of the deceased.
- Beneficiary is a minor ( but not a grandchild ) ( only “ stretched “ until this beneficiary reaches the age of majority or age 26 if still in school—-then ten year rule applies).
- Beneficiary is disabled ( per Social Security Administration guidelines )
- Beneficiary has severe chronic illness.
- Beneficiary is less than ten years younger than the deceased.
WHAT CAN MARY DO DIFFERENTLY IN 2020???
- If Mary is passionate about maximizing her legacy to Christine, she can:
- Transfer some of her traditional IRA money ( never taxes into a Roth IRA ( already taxed and thereafter tax free including earnings ).
- Use all or a portion of her RMDs ( Required Minimum Distributions ) which began for her at age 701/2, or her tax refund money ( if not needed by Mary ) to pay for the additional tax consequences of such a move.
ANTICIPATED BENEFITS TO EITHER MARY OR CHRISTINE OR BOTH
- Assume Mary ( retired ) is at a 12% tax bracket and Christine is at a 24% tax bracket.
- Assume Mary wishes to move $10,000 per year from her traditional IRA to her new Roth IRA. This should increase Mary’s annual tax liability by $1200 which she may fund from her RMDs, Federal tax refund check or otherwise as an estimated tax payment.
- Assume Mary passes away at age 85 ( in 2030 ) having transferred the $10,000 into the Roth in 2020. Further assume that the Roth IRA earned $7,000 during that 10 year period.
- Christine will inherit ( tax free ) $17000. If Christine was still at the 24% tax bracket ( tax due of $4,080 THE PAYMENT BY MARY OF $1200 IN 2020 SAVED CHRISTINE $4,080 IN 2030 ( A RETURN OF 15% PLUS PER YEAR TAX FREE
- What if Mary needed the money in 2030 and had not passed away! In this situation, Mary has full access to the $4,080 which will be tax free to Mary when taken.
THOSE INTERESTED IN A FREE CONSULTATION SPECIFIC TO YOUR ESTATE PLANNING NEEDS INCLUDING ( of course ) YOUR PERSONALIZED APPROACH TO ROTH IRAS ARE INVITED TO CALL ( 207-883-3511 0 OR EMAIL ATTORNEY BOUDREAU AT BOB@BOUD-LAW.COM