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IRA Tips for Later in Life

Christine Benz discusses how the SECURE Act affects required minimum distributions.

Editor's note: This video is part of our 2020 Tax and IRA Guide.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. If you have an IRA and you're already retired or close to it, a new retirement law has notable implications for how you manage your accounts. Joining me to discuss that topic today is Christine Benz, she's Morningstar's director of personal finance. Christine, thanks for joining me today.

Christine Benz: Susan, it's great to be here.

Dziubinski: So, let's start out with required minimum distributions, which are at top of mind for older adults who own IRAs.

Benz: Right.

Dziubinski: What's changing there for them?

Benz: Well, the SECURE Act, which passed at the end of 2019, had a provision that directly affects people who are just about to be subject to RMDs, and the big headline is that unless you turned age 70 1/2 in 2019 last year, that means that you're now subject to the new RMD start date, which is getting pushed out to 72. So, that's kind of a big deal for people who are right around that age of needing to take RMDs. They can push them off at least a year and a half.

Dziubinski: And so then how does that affect your planning from a tax and retirement planning perspective?

Benz: Well, when I first looked at this, I thought, "Well, potentially that's a big opportunity because there's what retirement planners, Maria Bruno at Vanguard, has called the retirement sweet spot," which is your post-retirement year, so you're not working anymore, you don't have an income, up until when those RMDs commence. And the reason that's called the sweet spot is because oftentimes it's a low tax time of life, you have more control over your tax bill than you do at other times in your life. Well, potentially having that pushed out to age 72 provides an opportunity. Where there's a drawback, though, is that most people at age 70 are taking social security, so you don't get any benefit for delaying social security past age 70. So, that's kind of a countervailing force that steps up and really reduces the extension of the retirement sweet spot.

But there are some things to think about. One that I think is potentially interesting is that even as the RMD start date, start age, moved out to age 72, the age at which you can take what are called qualified charitable distributions from your IRA is staying at 70 1/2. So, potentially there are some planning opportunities there. You can capitalize on that disconnect, talk to a tax advisor, but generally speaking if you're charitably inclined, that's something to consider with your IRA, and there may be also some opportunities to do some conversions prior to RMDs commencing at a later date. So, again, check with a tax advisor, see whether potentially converting some of your traditional IRA balances will make sense, especially given that you have a little more leeway in terms of that time when RMDs actually start.

Dziubinski: One part of the SECURE Act that's been a little less discussed has been retirees, even if they're already taking RMDs, can continue to make contributions to traditional IRAs. Who does that make sense for?

Benz: Well, not a lot of people. Jeff Ptak and I, our colleague, had a conversation with Jeff Levine, who's a tax and retirement planning expert, about this issue, and his point was that this is mainly about harmonizing the rules for traditional IRA contributions to put them in sync with what's in place with Roth IRA, so you can contribute to a Roth IRA at any age, now it's the same for traditional IRAs. When I examined this recently and stacked up traditional IRA contributions, certainly after RMD age relative to Roth IRA contributions or perhaps 401(k) contributions for people who are still working and able to contribute to a workplace plan, it's hard to see the traditional IRA contribution making a lot of sense. So Roth IRAs ... The name of the game is you can enjoy tax-free compounding, potentially for a longer time period, because there are no required minimum distributions.

And so, generally speaking, either the Roth IRA contributions or, potentially, traditional 401(k) contributions, which don't have RMDs as long as you're still contributing, those would tend to beat the traditional IRA contributions later in life. There may be a couple of situations where those traditional IRA contributions later would make sense. One would be for a person who's doing the backdoor Roth IRA; so, they have very high income for whatever reason, and they can't make a direct Roth contribution, that may be an opportunity to use the traditional IRA. And there may be another opportunity if someone is in a position to deduct that traditional IRA contribution, and they expect when they begin pulling money out of the account that they'll be in a lower tax bracket than when they're putting the contribution in. But again, kind of a narrow subset of situations where those traditional IRA contributions will make sense.

Dziubinski: And the SECURE Act also has an impact on IRA beneficiaries. Let's talk about that and what are some of the implications for older IRA account holders?

Benz: This is a biggie for people who are thinking about estate planning. And often when people are later in their lives, they want to make sure that their estate planning documents are very much squared away with their wishes. And so the big change in the SECURE Act with respect to IRAs is if you inherit an IRA and you're not a spouse, in most situations, you will have to take withdrawals from that account over a 10-year period. In the past, prior to the SECURE Act's passage, you were required to take required minimum distributions over your lifetime. So, if it's a young inheritor who inherits the account, that gives them the opportunity to really stretch out the tax savings. A 10-year period is obviously much truncated for younger people who might inherit.

This is an opportunity to check in with your estate planning attorney, make sure that what you've got in your IRA beneficiary designations elsewhere in your estate planning syncs up with your wishes and addresses this particular death of the stretch IRA, which was part and parcel of the SECURE Act.

Dziubinski: Christine, thank you for your time today for helping put these changes from the SECURE Act into perspective and giving us some IRA tips for those investors later in life.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.