Significant changes relating to tax-deferred retirement account distributions have occurred in recent months.
First and foremost, for 2020, the CARES Act suspended the requirement for older account owners to make mandatory distributions from their retirement accounts during the year because of the economic downturn. Of course, voluntary distributions are still permitted.
Further, for over 30 years, those with retirement accounts knew that voluntary withdrawals, subject to federal income taxes, could begin at age 59 1/2 and that required minimum distributions, based on an age/rate chart, had to start at age 70 1/2 (with certain exceptions).
Now, because of the SECURE Act, the magic age for required withdrawals (other than during the 2020 suspension) is 72.
This federal law became effective in December 2019 and has permanently extended the starting time for future mandatory distributions from retirement accounts to age 72. In these roller coaster stock market times, being able to wait that extra time could allow the account balance to recover.
Many people earmark their retirement accounts as possible inheritance funds for their family. Delaying distributions on these tax-deferred funds as long as the law allows can mean larger future balances.
The new law also changes the after-death rules for distributions to heirs. The full account balance must be paid out within 10 years, with exceptions for spouses and certain other individuals. Previously, many heirs could stretch out distributions over their lifetimes to reduce the income taxes owed from receiving such distributions.
Charitable use of Individual Retirement Account (IRA) funds can also be a way to avoid income taxes. Starting at age 70 1/2, amounts up to $100,000 from an IRA (but not from other types of retirement accounts) can be used each year for charitable purposes and escape federal and West Virginia taxation. These charitable gifts satisfy the required minimum distribution rules, when applicable, as well.
For assistance dealing with tax and other legal issues, contact West Virginia Senior Legal Aid at 800-229–5068. Those age 60 and over living in the state are eligible for this free help.