IRA distributions under SECURE

The 2019 SECURE Act made a major modification to post-mortem distributions of funds from IRAs and qualified retirement accounts to non-spouse designated beneficiaries. In most cases, if a designated beneficiary [DB] has been properly named, the funds have to be distributed, and taxed at ordinary income rates, within ten years of the death of the owner of the account. Previously, the funds could be distributed over the life expectancy of the DB. This is a dramatic shortening of the time for distributions, and for larger accounts this will be a significant change. The distribution schedule should be planned carefully. 

Most lawyers and financial advisors appear to assume that the distribution timeline after the death of the account owner should be the maximum ten years. Many, further, simply assume that 10% of the original amount should be distributed each year. That assumption overlooks the fact that the money invested in the account will continue to generate income and to grow in value over time. If the DB were to withdraw 10% of the funds each year for nine years, the IRA would still have, in the tenth year, 57.6% of the original amount that she started with in year 1. 

Our calculations show that the projection over time often justifies a shorter period of approximately six years. There is relatively little difference between the outcome at the end of a six-year period vs. at the end of a ten-year period. 

The calculations shown here assume an IRA worth $100,000 at the time of the owner's death. They also assume an average growth rate of 3% per year. 

The primary benefit of using the alternative six-year period is that the funds that remain after taxes are paid are in the hands of the beneficiary several years sooner. Over the six years, the distributions are made, beginning at 10% and then increasing by 10 percentage points each year thereafter, until year six, when the amount remaining is distributed. Tax is paid on the distributions, at the Federal marginal rate of 22% in most cases, but then the remaining assets are held outside of the IRA container, and they can continue to appreciate, no longer subject to income tax. The cost basis for purposes of calculating long-term capital gains would be the fair market value on the date of distribution.

Michigan Treasury Reports

 The reported increases in statutory figures for 2023 are: 

Spouse's intestate share	2102, MCL 700.2102	273,000
Spouse's intestate share	2102, MCL 700.2102	182,000
Homestead allowance	2402, MCL 700.2402	27,000
Exempt property	2404, MCL 700.2404	18,000
Family allowance	2403, MCL 700.2403	33,000
Small estates	3982, MCL 700.3982	27,000
Sworn statement	3983, MCL 700.3983	27,000
Terminating small trusts	7414, MCL 700.7414	91,000

As a reminder, the smaller amount under section 2102 applies if none of the decedent's children are also children of the surviving spouse. 

The new year

Happy New Year to all! 

Federal figures that will apply for the living and those who die in 2023: 

• The per-person amount that is exempt from gift reporting requirements: $17,000. 
• The estate/gift tax exemption equivalent is now $12.92 million per person. 

The State of Michigan will announce updated probate figures later this month at this site. 

Who decides?

 TMZ has a story this morning: "Aaron Carter died without a will... so now the State of California will decide who inherits his estate."

This is commonly found on lawyers' web sites and blog posts. "If you don't have a will, the state will decide where your property will go." That statement is untrue. 

Each state has intestacy statutes, which provide a priority of inheritance if a person dies without a valid will. Those intestacy provisions apply only to "probate assets," that is, assets owned by the decedent in his own name. They do not apply to assets held in trust, to jointly-owned property, to property with transfer on death directions, or to retirement accounts (unless the owner did not make a beneficiary designation.) 

What is true is that, if you do not want that order of priority followed, you need a will, a trust, or some other mechanism to make sure that does not happen. 

The intestacy statute is intended and designed to follow what most people would want to happen to their money. The priority is, in general, spouse, children, parents, siblings, their children (nephews and nieces),  grandparents, and their descendants (cousins). 

It is emphatically not the case that a probate judge in California will make a decision about who will receive Carter's assets. The court will simply follow the intestacy laws. 

Medicare Advantage?

 It's Medicare open enrollment season. The Retire Early site offers Top 5 things your Medicare Advantage sales agent won't tell you.

More tax from online sales

From Bloomberg: The IRS is coming for your Venmo income.  The IRS is reported to have imposed a new requirement for Form 1099-K, on which an "online payment settlement entity" will be required to report any payment over $600 (down from the previous $20,000). The story begins with "Lexi," who frequently buys items at garage sales and flea markets and sells them on eBay, making as much as $15,000 per year. Up to now, that income has been tax-free for her - because she has not reported it. 

The IRS is not changing the tax laws. Any time that you buy something for $x and then sell it for $x+y, the $y is regarded as a capital gain, and tax has to be paid on capital gains. It is up to you to keep track of how much you paid for the item and how much profit you made on the sale. 

For a single person, long-term capital gains are taxable only if your income is over $40,000 or so. These rates require that the item be held for a year or more before it is sold. If it is sold earlier than that, the gain is taxable at ordinary income rates. 

More information from the IRS is available at its About Form 1099-K page. 

Update: In early January, the IRS announced a one-year delay in implementing this new policy. 

The tax implications of cryptocurrency

If you have created cryptocurrency through a "mining" process, did you pay income tax on the resulting cryptocurrency? The IRS regards it as an asset and it requires payment of income tax, at ordinary income rates, when it is acquired. It does not matter that it has resided in a "wallet" since then and has not been used or converted. If it could have been used as money or converted to dollars, it is a taxable asset and the creation of that asset is regarded as recognition of income. (See IRS notice 2014-21)

If you acquire a unit of a cryptocurrency by purchase, there is no income recognized and no income tax owed. You have traded dollars for other units at the then-effective price. The purchase price becomes your cost basis for purposes of determining later capital gains or losses. 

Cryptocurrency that has changed in value since it was originally acquired generates capital gains or losses whenever it is spent or converted. It is a long-term capital gain (or loss) if it is held for more than one year, and the act of spending it or converting it results in the recognition of that gain (or loss), with an accompanying tax obligation. Depending on your income level, the tax on a LTCG is 0%, 15%, or 20%.