Category: Tips & Advice

Yesterday, I began a 3-part series about some of the questions people are asking about recent federal legislation. Specifically, those questions are:

1. Was Obamacare really declared unconstitutional by the Supreme Court?
2. Were the required minimum distributions (RMDs) at age 70 ½ from your retirement plan really eliminated?
3. And how about the threshold for writing off medical expenses–was that also tossed away?

I answered question #1 in yesterday’s blog post and will answer question #3 in tomorrow’s blog post. Here’s my answer about the changes the SECURE Act brought to required minimum distributions (RMD).

The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into law in December 2019 as part of the Further Consolidated Appropriations Act of 2020. The SECURE Act deals primarily with retirement plans–and a number of changes to those plans, especially to qualified plans.

A qualified retirement plan is established with money that has not been taxed. Examples include an employee depositing money into an IRA or 401(k) with salary before payroll taxes are deducted, or an employer depositing matching funds.

The IRS has long required individuals to begin withdrawing funds from qualified accounts at a specific age. Why? So it can collect taxes on that money! If a person establishes an IRA, or begins contributing to a 401(k) at age 40, the government doesn’t collect any taxes on the funds in these qualified plans until the account holder begins withdrawing the funds. A person can easily build an account with hundreds of thousands of dollars over a lifetime of working.

The required beginning date of a retirement account is the date the account holder MUST begin making withdrawals–withdrawals that will be taxed by the IRS. These withdrawals are called required minimum distributions, or RMDs. For people who turn age 70 ½ on or before January 1, 2020, RMDs must be taken no later than April 1 of the year after the account holder turns age 70 ½.

For example:

• If my 70^th birthday was March 3, 2018, I turned 70 ½ on September 3, 2018. I had to make my first RMD no later than 4/1/2019.
• If my 70^th birthday was October 9, 2018, I turned 70 ½ on April 9, 2019. I have to make my first RMD no later than 4/1/2020.

Per the SECURE Act, the required beginning date was changed to 72 because many people are working longer. But it only changed for those who turn 70 ½ after 1/1/2020. People who turn 70 ½ after 1/1/2020 must begin their RMDs no later than April 1 of the year after they turn age 72. For example, if my 70^th birthday is February 21, 2020, I will have to take my first RMD by April 1 of 2023 because that is the year after I turn age 72.

One of the issues concerning this age change is the fact that some people won’t have to make any RMDs in 2020. Here’s a Forbes article that explains this issue in more detail.

One final thing about RMDs. Before the SECURE Act, individuals could not begin a traditional IRA after age 70 ½, nor could they make contributions to it after that age. Now, so long as a person is working and earning income, he or she can open and make contributions to a traditional IRA at any age.

Check back tomorrow for the third and final part of this blog post series: the medical expense deduction threshold.

Was Obamacare really declared unconstitutional by the Supreme Court? Were the required minimum distributions (RMDs) at age 70 ½ from your retirement plan really eliminated? And how about the threshold for writing off medical expenses–was that also tossed away?

These are some of the questions people are asking in light of recent federal legislation. I’m going to answer these questions and clear up the misunderstandings most people have about the subjects in a 3-part series of blog posts.

Today, let’s talk about the Affordable Care Act (ACA)–what many people call “Obamacare.” The ACA contains a provision referred to as the individual mandate; this provision requires most Americans to purchase and keep in place a particular form of health insurance to avoid paying a tax (the individual shared responsibility payment) when they file their federal income tax returns.

In 2017, the Tax Cuts and Jobs Act (TCJA) reduced that tax to $0. Immediately after the TCJA went into effect, opponents of the ACA filed litigation, claiming the individual mandate was no longer constitutional. Their basis was the Supreme Court’s original ruling that the individual was constitutional because it contained a tax that met four requirements. Well, after the court case wended its way through the judicial system, the U.S. Fifth Circuit Court of Appeals agreed with those filing suit.

Specifically, the court ruled that the individual mandate was unconstitutional because it no longer contained a tax provision. Why? Because the individual shared responsibility payment no longer produced income to the federal government, was no longer paid by taxpayers, could no longer be determined by a taxpayer’s tax return, and was no longer enforced or collected by the IRS.

As of this writing, you will not be charged a tax if you didn’t have health insurance last year. And it’s looking like that is how it will be moving forward–at least with respect to the tax.

With respect to the rest of the ACA’s provisions, that’s anyone’s guess. Part of the case heard by the court of appeals related to whether the individual mandate could be severed from the ACA. Some want to strike the entire ACA unconstitutional because that was the fate of the individual mandate. However, the federal court has sent that portion of the case back to the district court for review. The Supreme Court just recently rejected a recent request for the process to be accelerated, so many believe the issue won’t be resolved until the fall of this year.

Check back tomorrow for the second part of this series: required minimum distributions (RMDs) and the age 70 1/2 threshold.