We Answer Your Retirement Questions

Summary

WSJ Your Money Briefing

Episode: We Answer Your Retirement Questions
Date: February 13, 2020
Host: J.R. Whalen
Guest: Ann Tergesen, Wall Street Journal Reporter

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Episode Overview

This episode addresses the many questions raised by recent changes in U.S. retirement account laws. Wall Street Journal reporter Ann Tergesen provides expert guidance on required minimum distributions (RMDs), the elimination of the "stretch IRA," alternatives for estate planning, special rules for different retirement account types, and practical strategies for leaving assets to heirs. The discussion is aimed at both retirees and savers, offering clarity on how the new law impacts their financial planning and legacy decisions.

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Key Discussion Points & Insights

1. New Age for Required Minimum Distributions (RMDs)

• Background: The minimum starting age for RMDs increased from 70½ to 72.
• Applicability:
  • If born after June 30, 1949, you can wait until age 72 to start RMDs.
    • "If you were born after June 30, 1949, you can wait to age 72 to start your RMDs." — Ann Tergesen (01:45)
  • If born before July 1, 1949, you must adhere to the old 70½ rule.
• Deadlines:
  • First RMD: Due by April 1 of the year after you turn 72
  • Second RMD: Due by December 31 of that same year (the year you turn 73, per the example)
  • Potential tax impact if both RMDs are taken in the same year.
    • "That’s going to put you into a higher tax bracket. So if you want to voluntarily take the first RMD in the year in which you turn 72... that’s fine too." — Ann Tergesen (02:32)

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2. Elimination of the "Stretch IRA"

• Overview:
  • The "stretch IRA" allowed heirs to stretch RMDs over their own life expectancy, often maximizing tax-deferred growth.
  • New law enforces a 10-year window to fully liquidate inherited IRAs for most heirs if the decedent died after January 1, 2020.
  • Grandfathering:
    • Those who inherited before January 1, 2020, retain the stretch provisions.
    • "If you've already inherited it, and you're before January 1 of this year, you're fine, you don't have to worry." — Ann Tergesen (03:56)
• Definition:
  • "So the stretch IRA is a really beneficial arrangement by which, if you inherited an IRA again before this year, heirs are required to also take required minimum distributions... based on your own life expectancy." — Ann Tergesen (04:14)
• Impact:
  • Heirs now must take all funds out of the IRA within 10 years, losing years of tax-advantaged growth.

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3. Alternatives for Leaving Assets to Heirs

• IRA as a Less Attractive Asset:
  • Due to new liquidation rules, IRAs are less ideal for multi-generational wealth transfer.
  • "Now with the elimination of the stretch IRA, the IRA has become a less attractive asset to leave to your heirs than it was before the law changed." — Ann Tergesen (04:58)
• Alternative Strategies:
  • Use IRAs for Living Expenses/Charity: Retirees can use up their IRAs for themselves or donate to charity.
  • Leave Other Assets:
    • Assets like stocks, bonds, or real estate (outside IRAs) get a step-up in basis, minimizing heirs' tax liability.
      • "Those receive what's called a step-up in basis... any kind of capital appreciation... becomes non-taxable." — Ann Tergesen (05:15)
  • Leave IRA to a Spouse:
    • Spouses can still use the stretch provision, potentially stretching distributions over decades.
      • "...a good four decade stretch option." — Ann Tergesen (05:40)
  • Life Insurance:
    • Use after-tax dollars now for tax-free proceeds to heirs.
      • "Life insurance... is a much more tax efficient asset to leave to heirs because... the proceeds are free of income tax." — Ann Tergesen (06:17)

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4. IRAs Left to Trusts: Complexities and Risks

• Why Use Trusts:
  • Useful for restricting access (e.g., for young or financially immature heirs).
• New Rules:
  • Trusts now also subject to 10-year liquidation rule.
    • "In some cases, some of these trusts are going to have to liquidate the asset within a decade, which means that the very people... you're trying to prevent from getting their hands on all the money are going to get their hands on all the money within a decade." — Ann Tergesen (06:28)
• Potential Fixes and Tax Traps:
  • Extending trust terms exposes them to steep tax rates (37% over $13,000 in income).
    • "The trust is going to pay a 37% tax rate." — Ann Tergesen (07:44)
  • Strong recommendation for trust holders to consult with estate planners and tax professionals.

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5. Special Rules for Government and Employer Retirement Plans

• 403(b), 457, and Thrift Savings Plan:
  • Government and certain public-sector plans get a two-year grace period.
    • "They have an additional two years in which to comply with the elimination of the stretch IRA." — Ann Tergesen (08:25)
    • If you inherit these accounts before December 31, 2021, you can still use the stretch IRA rules.
• 401(k) Accounts:
  • Subject to new 10-year rule for heirs of decedents dying after December 31, 2019.
    • "If you inherited from someone who died after December 31st of 2019, you have to liquidate within 10 years." — Ann Tergesen (09:02)

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Notable Quotes & Memorable Moments

• On the core challenge for trusts:
  • "The very people, the heirs, who you're trying to prevent from getting their hands on all the money, are going to get their hands on all the money within a decade." — Ann Tergesen (06:58)
• On the importance of professional guidance:
  • "People who have trusts really need to sit down with the people who've advised them on setting up these trusts and figure out a solution." — Ann Tergesen (08:07)

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Important Timestamps

• 01:45: New starting age for RMDs and who it applies to
• 02:23: RMD deadlines, how the first and second RMDs work
• 03:38: End of the stretch IRA provision, key cut-off dates
• 04:14: Definition and benefit of the stretch IRA
• 04:58: Alternatives for leaving retirement assets to heirs
• 06:28: Complications and tax considerations for IRAs left to trusts
• 08:25: Special rules for 403(b), 457, and Thrift Savings Plan accounts
• 09:02: 401(k) accounts and the new liquidation rules

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Summary

This episode, featuring Ann Tergesen, offers authoritative, actionable explanations for Americans navigating the revised landscape of retirement account rules. Listeners come away understanding who the new RMD rules apply to, the end of the stretch IRA, workarounds for efficient estate planning, the pitfalls of leaving IRAs to trusts, and exceptions for specific government plans. The advice is to closely review existing estate plans and consult professionals, especially in light of the complex new rules and their significant financial impacts.

Transcript

[A]

Still running global payroll like a relay race Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.

[B]

Here's your money briefing. I'm J.R. whelan at the Wall Street Journal in New York. Late last year, Congress overhauled the rules for retirement accounts and that raised lots of questions among savers and retirees. Wall Street Journal subscribers sent in all sorts of questions about different aspects of the new rules, like required withdrawals from IRAs and and how to leave an IRA to your heirs.

[C]

In some cases, some of these trusts are going to have to liquidate the asset within a decade, which means that the very people, the heirs who you're trying to prevent from getting their hands on all the money are going to get their hands on all the money within a decade.

[B]

Wall Street Journal reporter Ann Tergeson tackles your retirement questions. That's next. Retirement plans saw some significant change after Congress passed a new law last year, and Wall Street Journal subscribers had plenty of questions about it. Journal reporter Ann Tergeson is here with answers. So Ann, there are a lot of questions regarding tax deferred retirement accounts, specifically the deadlines involved with required minimum distributions or RMDs.

[C]

There is a change in the law that allows people to start their RMDs at age 72 rather than the old rules were age 70 and a half. But that doesn't apply to everybod. A lot of readers are wondering, does this apply to them? Probably the simplest way to think about it is if you were born after June 30, 1949, you can wait to age 72 to start your RMDs. However, if you were born before July 1, 1949, you have to stick to the old rules, which means starting at age 70 and a half.

[B]

And then how about the second required minimum distribution you have to take right?

[C]

So people are also wondering, you know, what's the deadline? If I qualify to start at age 72, when do I have to take my first RMD and when, when do I have to take My second RMD? And the answer is that it actually adheres to the same pattern as with the old rules for starting at age 70 and a half. So it sounds a little technical, but basically what you do is you have to start by April 1st of the year following the year in which you turn 72. So, for example, if you turn 72 in 2022, you have to take your first RMD by April 1st of 2023. The second RMD is due in that same year. So you would have to take a second RMD in this example by December 31st of 2023. So you can take them both in the same year. Obviously, for some people that's not ideal because that's going to put you into a higher tax bracket. So if you want to voluntarily take the first RMD in the year in which you turn 72, 2022 in the example I was saying, that's fine too.

[B]

December's legislation from last year also eliminated the stretch ira. And with that going away, what are some alternatives for people who want to leave assets for their heirs?

[C]

Right. So first of all, the stretch IRA is not going away for everybody. If you inherited an IRA from someone who died from January 1st of this year on, then you're sort of out of luck. You then have to adhere to this new 10 year rule to liquidate the account. People who inherited from people who died previous to 2020, they still get to stick with the stretch IRA. If you've already inherited it and you're before January 1st of this year, you're fine, you don't have to worry.

[B]

Just refresh us with a stretch IRA is right.

[C]

So the stretch IRA is a really beneficial arrangement by which, if you inherited an IRA again before this year, heirs are required to also take required minimum distributions. So you could take your required minimum distrib for that account based on your own life expectancy. So say you inherit and you're like 25 years old, you're going to have a pretty long life expectancy. So that's only if you're going to adhere to taking RMDs on your life expectancy. You're only going to have to take out a small amount every year. And the benefit to that is that it allows more of the money to stay in the account and continue to grow on a tax advantaged basis.

[B]

And for people who want to leave assets to their heirs, what are some alternatives?

[C]

Now with the elimination of the stretch ira, the IRA has become a less attractive asset to leave to your heirs than it was before the law changed. So one solution is for the account owner to basically use the IRA for his or her own living expenses or for charitable contributions and leave their heirs other assets such as stocks and bonds and real estate that are held outside of IRAs, those receive what's called a step up in basis, which means that, you know, any kind of capital appreciation that occurred during this deceased person's lifetime becomes non taxable. So that's sort of an attractive option. Another option with an IRA is maybe to leave it to your spouse because the spouse can continue to use the stretch IRA provisions. So even if your spouse is 70 year old who inherits an IRA, that person still has an almost 30 year life expectancy. So, you know, in this case, I assume, you know, the spouse who inherited is a woman, she can then stretch the payouts over her remaining life expectancy, which is significant a couple decades, then leave what remains of the IRA afterwards to children or grandchildren who then get the 10 year. So that's, you know, that's a good, you know, four decade stretch option. Another option is life insurance, which is a much more tax efficient asset to leave to heirs because while you have to put in after tax dollars into a life insurance policy, the proceeds are free of income tax.

[B]

And what happens if somebody wants to leave their IRA to a trust?

[C]

A lot of people say some people decide that rather than just, you know, giving their child or their grandchild an IRA outright, you know, they're concerned that maybe especially if people are younger or they have, you know, some sort of financial difficulties, that they may just raid the account all at once. Or maybe, you know, some people don't make wise spending decisions or whatever the reason, sometimes people want to kind of tie the money up in restrictions. So in order to do that, people leave money to a trust. But the new rules which require people who inherit after January 1st of this year to take the money out of these accounts within a decade, that can create problems for these trusts because basically in some cases, some of these trusts are going to have to liquidate the asset within a decade. Which means that the very people, the heirs, who you're trying to prevent from getting their hands on all the money, are going to get their hands on all the money within a decade. There's sort of an obvious fix for that, which is if you have a trust, you can amend the terms of the trust saying that it can endure for a longer period than just than the RMDs are going to last. So that will enable the trust to stay in effect for longer than a decade. The problem there is that trusts pay a very high tax rate quickly. So once their income hits 13,000, the trust is going to pay a 37% tax rate. If you amend the trust and say it can hold onto this money for longer than 10 years. Then the trust is going to have to sell the IRA and liquidate within 10 years and they're going to have to pay a very high tax rate. So that's not a good solution either. So people who have trust really need to sit down with the people who've advised them on setting up these trusts and figure out a solution.

[B]

You also got some questions about the numerical soup of sorts of retirement accounts. 401, 403, 457. Are they all treated the same under the new law?

[C]

Well, when it comes to the elimination of the stretch IRA, they're not. The government plans, 403 and 457 plans for government workers, as well as the Thrift Savings Plan, which is for federal workers, they have an additional two years in which to comply with the elimination of the stretch ira. So that basically means if you inherit one of those accounts up until December 31st of 2021, you can still adhere to the old rules, which means you can use the stretch IRA and take your distributions, your required distributions over your own lifetime. So that's beneficial for those people.

[B]

And then the 401 is the same

[C]

under the new law, the 401k, the stretch IRA provision has already gone away. So if you inherited a 401 before January 1st of this year, you can still continue to use the stretch IRA provisions. If you inherited from someone who died, you know, after December 31st of 2019, you have to liquidate within 10 years.

[B]

A lot of dates to keep track of.

[C]

Yes.

[B]

All right, that's Wall Street Journal reporter Ann Tergerson with us. Anne, thanks for coming on the show.

[C]

You're welcome.

[B]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[A]

Deal replaces fragmented Payroll vendors with one global system. No third parties, hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e l.com WSJ.