Paul Neiffer: These Retirement Tax Laws Changes Could Affect You
As part of the government funding bill passed in December 2019, Congress elected to make several changes to the tax law. Here are the key changes and how they apply to farmers.
New Minimum Distribution Age
Farmers who have socked away funds in an individual retirement account (IRA) or other retirement plans are required to start taking certain required minimum distributions (RMD) in the year they turn 70½. They also have an option to take that distribution by April 30 of the following year, but then they must take their age 71 distribution in that year. This can create additional tax.
The new law changes this age to 72. It is much easier for taxpayers to know when farmers turn 72 versus 70½. However, this new law only applies to taxpayers who have turned 70½ after Dec. 31, 2019. If you turned 70½ in 2019, you are stuck with the old rules.
No More “Stretch” IRAs
Under the old rules, farmers who left larger retirement accounts to their children were able to “stretch” the RMD over the life of the child.
For example, suppose Farmer John passes away in 2019 and leaves his IRA to his three children ages 12, 14 and 16. They would be able to take minimum distributions over their lifetime (which could easily be 80 years or more). This would keep that income in a lower tax bracket and allow for much longer deferral of income.
The new law eliminates the ability to stretch out these distributions for longer than 10 years for most non-spousal beneficiaries. Exceptions are allowed for certain taxpayers such as disabled, terminally ill, minor children or if the beneficiary is within 10 years of the deceased taxpayer.
Congress indicated retirement plans are for retirement — not for wealth transfer. However, this is certainly changing the rules mid-stream. Farmers in lower tax brackets might want to consider Roth conversions.
If you have created trusts to receive these distributions, check with your professional adviser immediately. You might need to make some changes.
No Age Limits
Finally, Congress now allows older farmers to continue to contribute to IRAs. Under the old law, once a farmer reached age 70½, they could no longer contribute. The new law allows them to contribute at any age, as long as they have earned income.
Read more analysis and insights to tax questions on Paul’s blog at AgWeb.com/farm-cpa