It's clear from our latest batch of listener questions that the Keen on Retirement audience has been paying attention to how recent legislation is affecting retirement planning. But today's episode should also clarify just how challenging it can be for folks to find the answers they need when so many details keep changing. My team at Keen Wealth doesn't just dig into the fine print: we understand how to apply these rules to individual financial scenarios and create appropriate outcomes for folks in retirement.
1. Does the five-year withdrawal penalty apply to Roth IRA principal deposits?
The benefits of a Roth IRA are significant: while contributions are not tax-deductible, earnings can grow tax-free, and qualified withdrawals are tax- and penalty-free. You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA. Roth IRA withdrawal and penalty rules are dependent on multiple factors such as age, account duration, and other criteria. To avoid taxes and a potential 10% early withdrawal penalty on earnings, it is crucial to keep in mind the following guidelines before making a Roth IRA withdrawal: withdrawals must occur after reaching 59 ½ years of age or after maintaining the account for at least five years, whichever is longer. There are, however, certain exceptions to the early withdrawal penalty, such as purchasing a first home, college expenses, and childbirth or adoption costs.
2. Megan is 40. Her mother turned 70 in January of 2021 and passed away in April of 2021. Megan took receipt of her mother’s IRA and opened an inherited IRA for herself in 2021. When does Megan need to start taking distributions from her inherited IRA?
At the end of 2022, the IRS clarified the 2019 SECURE Act's rules around the end of "stretch" distributions from inherited IRAs. We had a thorough conversation about inherited IRAs at the end of this episode if you'd like to read more about these changes.
As to Megan's specific situation, her mother wasn't 72 when she died, so she had not started taking required minimum distributions (RMDs) from her retirement accounts. That means Megan has 10 years to withdraw the entire balance of the account she inherited. Hopefully she'll get some good advice from a tax pro and her financial advisor on the best way to manage those withdrawals.
3. I am 72, and I plan to stop working in June of 2024. How does the Secure Act 2.0 impact the ability for individuals who have 401(k)s to delay RMDs as long as they continue working for the employer who sponsors the plan?
The SECURE ACT 2.0 changed the age that retirees and non-workers have to take RMDs from 72 to 73. But if you're still working, the rules are the same: as long as you're employed, you do not have to take RMDs from the employer sponsored retirement plan at your employer. If you have an IRA, that account will still be subject to an RMD.
4. Can a parent use his or her IRA to pay tuition for a child attending law school or another graduate program without penalty?
Yes, there are education exceptions to early IRA withdrawal penalties, as long as the money is used for yourself, your children, or your grandchildren. However, that withdrawal is subject to income tax, and you have to use the money on qualified expenses, such as tuition, room and board, and books.
On a related note, the SECURE Act 2.0 also added some welcome flexibility around using funds in 529 accounts for things other than education if your kids or grandkids don't need that money for school or end up skipping college. Higher education sure isn’t getting any cheaper, so I'm glad to see that the government is making it easier for families to plan ahead for college and also tap into some extra resources when necessary.
5. At age 63, I plan to move abroad permanently. Should I apply for Medicare at age 65 in case I decide to move back to the U.S. later in life?
I like that this question is coming from a 60-something who's envisioning decades of an adventurous retirement ahead!
If this person decided to return home in 10 or 20 years, they'd have to pay a 10% late enrollment fee on top of their monthly Medicare premium for every 12-month period you weren't paying for Medicare Part B. Are those fees going to add up to more than the cost of paying for Medicare Part B -- currently $164 per month -- even when you're not using it?
And just how positive are you about living abroad "permanently?” Could new grandkids change your thinking? Do you have a group of friends who will be retiring soon? Or what if living in a different country makes you homesick?
That's where our conversation with this person would circle back to the important discussions we have with folks at Keen Wealth: family, health, recreation, personal growth, and long-term goals.
Let my team worry about what's in the next big piece of financial planning legislation so that you can stay focused on using your money to enjoy the things that matter the most in your life.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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