Changes to Inherited IRAs in 2020

Changes to Inherited IRAs in 2020

When the time comes for a beneficiary to take over the assets of their loved one’s IRA, one of the options is to open an Inherited IRA or Beneficiary IRA. This plan allows the beneficiary to continue the tax-sheltered status of the assets and cash they’ve just inherited.

A FEW KEY ITEMS TO CONSIDER:

  1. Contributions cannot be made to the Inherited IRA
  2. IRA Transfers may only be from Inherited to Inherited
  3. Inherited accounts require distributions, even Roth (however, while taxes may be owed, the early distribution penalty does not apply to any inherited account)
  4. Following the SECURE Act, most beneficiaries will be required to cash out the account within ten years
  5. Spouse beneficiaries can rollover to their account
  6. A beneficiary has nine months from the date of death to disclaim the IRA

IRA contributions, in general, can only be made to an IRA if the account holder has earned income, regardless of age (thanks to the SECURE Act). Contribution limits vary based on income and account type. In an Inherited account, contributions are not permitted, and the account must be fully distributed within ten years of the original account holder’s death. Only a few exceptions apply to the new ten-year rule; the SECURE Act effectively eliminated the “Stretch IRA,” which once allowed beneficiaries to take distributions based on his or her life expectancy. Click here to learn more about how the SECURE Act tax law affects retirement plans.

Inherited accounts open after December 31, 2019, no longer require the need for annual distributions to be calculated, however, it is in the best interest of the beneficiary to work with a financial professional to make a plan for distributing within the ten-year period and paying taxes on distributions from an inherited Traditional IRA. The CARES Act has waived all 2020 required distributions, which applies to Inherited accounts opened before December 31, 2019. Click here to learn about the top 7 RMD changes that have occurred with the CARES Act.

Spouses are allowed to inherit an account directly and treat the IRA as their own, which may be especially beneficial if the spouse inherits a Traditional IRA and is not yet RMD (required minimum distribution) age. A spouse beneficiary may still decide to treat the account as an Inherited Account. It is recommended that the spouse speaks with a CPA before making a decision.

If a beneficiary decides they do not want the account they have inherited, they are allowed to disclaim their interest within nine months from the date of death. The beneficiary cannot re-designate the inheritance; the account will likely fall under probate law.

For questions or more information regarding Inherited IRAs, contact Midland by visiting www.midlandtrust.com or by calling 239.333.1032.

3 Last-Minute Ways to Reduce Taxes

3 Last-Minute Ways to Reduce Taxes

With the tax deadline extended to Wednesday, July 15th, you still have time to reduce your tax bill. Here are three simple tips to help.

1. CONTRIBUTE TO AN IRA

You have until July 15th this year to make Traditional or Roth contributions for 2019.

IRA contributions can be made to a Traditional or Roth account, even if you already contribute to a 401(k) or other employer plans. The contribution limits for 2019 are $6,000 if you are under 50 and $7,000 if you are over 50. The ability to deduct the contribution from your taxable income is based on whether or not you contribute to an employer plan, as well as your income. Even if you can’t deduct the contribution, you can still make a nondeductible contribution.

What if your spouse doesn’t have earned income?

You can still make a contribution to a Traditional or Roth contribution based on your own earned income.

2. CONTRIBUTE TO A TEEN’S OR YOUNG ADULT’S IRA

If you have a teen or young adult who had jobs generating W-2’s for 2019, you could make an IRA contribution that helps them in three ways.

  1. For 2019, single filers who make $32,000 or less and contribute to an IRA can get a tax credit worth up to $1,000.
  2. Contributions made to Traditional IRAs reduce taxable income, and your teen/young adult is eligible to contribute a maximum of $6,000 per year to their Traditional or Roth IRA. Any amount contributed to a Traditional IRA reduces the tax bill. For example, if your teen made $6,000 over the summer and made a $3,000 Traditional IRA contribution, they will only pay taxes on $3,000.
  3. If your young adult needs to purchase medical coverage through a state insurance marketplace, making an IRA contribution can qualify them for a larger health insurance premium tax credit. In order to get the credit, the IRA contribution must be made by the July 15th deadline.

3. MAXIMIZE YOUR HSA

If your health coverage for 2019 was considered a high-deductible insurance plan, you can still contribute to an HSA and have it count towards your 2019 taxes. The IRS defines a high-deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.

HSAs are the only vehicle that reduces your tax when you make the contribution and offers tax-free distributions when you use the funds for qualified health expenses for you and your family. HSA contribution limits for tax year 2019 are $3,500 for an individual and $7,000 for a family. If you’re 55 or older, you can add $1,000 to these limits.

For questions or more information on how you can use your IRA or HSA account to reduce your tax bill this year, contact Midland by visiting www.midlandtrust.com or calling 239.333.1032.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Investing in Space

Investing in Space

Could space be the next stock boom? Investing in space carries substantial risks and rewards as the industry is relatively new and in exploration stages. With SpaceX’s recent successful launch of the Crew Dragon, we grow closer to living in a world with space tourism, off-world mining, or even colonization on Mars.

Investing in the next stock boom, whatever it may be, can potentially bring huge rewards. To maximize those potential earnings, you may want to consider investing using retirement funds in an IRA. In an IRA or 401(k), any gains are sheltered from capital gains tax and can continue to grow tax-deferred until they are distributed. With a Roth IRA, your earnings may be distributed tax-free.

Here are some ways you can invest in space.

PRIVATE SPACE COMPANIES

There are quite a few private space companies such as Elon Musk’s SpaceX, Jeff Bezo’s Blue Origin, Moon Express, ConsenSys Space, and Skywatch, to name a few. However, investing in a private space company is not as easy as clicking a button and buying stock. To invest in a private company, you will first need to identify the company and then wait for them to make a share offering to raise capital or find a hedge fund/venture capital firm.

Private space companies can be a much bigger risk as they are illiquid (not traded on an exchange), require long investing time frames, maybe in development stages, and may never be profitable. Additionally, you may need to qualify as an Accredited Investor to participate in the offering.

If you are looking to invest in a private space company through your IRA, don’t go asking your brokerage firm to do so. It is likely not in their business model, and they will not be able to hold the investment for you.

This is where Midland comes in. We specialize in holding alternative investments such as real estate, promissory notes, futures/forex, and private stock. Midland will be able to hold your investment and do the necessary recordkeeping and reporting to the IRS, allowing you to invest in private space companies with your IRA.

PUBLICLY TRADED SPACE COMPANIES

Many of the publicly traded space companies considered “space” investments make engines, rockets, and satellites that we see, or will see, in space. These companies include Boeing (BA), Lockheed Martin (LMT), Northrop Grumman (NOC), Aerojet Rocketdyne (AJRD), and Maxar (MAXR). There is also Virgin Galactic (SPCE), which is developing commercial spacecraft and aims to provide suborbital space flights and launches to space tourists and for scientific missions. You can also invest in companies that are related to the space industry. For example, you could invest in companies that create technologies, vessels, and equipment used by private and publicly traded space companies. For instance, Midland has handled private investment transactions with a company that makes composite pressure products for the aerospace industry.

Although Midland specializes in Self-Directed assets, such as private placements, we can also hold a brokerage account as an asset within your Midland account. This will allow you to trade publicly traded stocks while keeping everything under the Midland umbrella.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

AUTHOR: Andy Anger, Senior Associate in Client Services at Midland Trust