We are going to share some information about a very important change to the guidelines for individual retirement accounts for current account holders and beneficiaries. Before we get to it, we have to provide some necessary background information about these accounts.
Traditional Individual Retirement Accounts
When you have a traditional individual retirement account, the contributions that you make into the account are made before you pay taxes on the income. This has positive tax consequences because you are going to be taxed on less income.
You are generally not allowed to take distributions from the account without being penalized until you are 59.5 years of age. There are a few exceptions to this rule, but we will cover them in a different blog post.
That ever-present tax man wants to get some money eventually so you are required to take distributions after you reach age 72. The age had previously been 70.5, but it was raised due to provisions contained within the Setting Every Community Up for Retirement (SECURE) Act that was enacted in December of 2019.
Beneficiaries of this type of account have distribution requirements as well.
The other common type of account is the Roth individual retirement account. Taxation works in the reverse manner with this type of account. You pay taxes on the income before you make contributions into your Roth IRA.
Once you reach age 59.5, there are no withdrawal penalties. At that point, the major difference is that you never have to take required minimum distributions because the IRS has already been fully satisfied.
Beneficiaries of Roth IRAs also enjoy tax-free distributions, but they do have distribution requirements. Prior to the enactment of the SECURE Act, a beneficiary could often keep the money in the account for a long time. This was actually an estate planning strategy called stretching an IRA.
Now, all of the assets in the account must usually be distributed within 10 years. It should be noted that this also applies to traditional individual retirement accounts.
The coronavirus has taken a toll in many different ways, and it has certainly played havoc with the economy. Required minimum distribution amounts are based on the value of a given account at the end of the previous year. When this year started, the accounts were valued at a particular level that was the result of steady stock gains over recent years.
As we all know, stocks plummeted as a reaction to COVID-19. In an effort to ease some of the economic pain, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). A provision within this piece of legislation impacts the required minimum distributions.
The minimum distribution requirement has been entirely waived for 2020 for both types of individual retirement accounts. This applies to original traditional account holders that are more than 72 years of age along with beneficiaries of both types of accounts.
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