In December 2019, Congress passed the SECURE Act, a landmark legislation that may impact your wealth planning strategies. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax, charitable and retirement planning situation.
Here is a look at some of the important elements of the SECURE Act. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact.
Repeal of the Maximum Age for Traditional IRA Contributions
The SECURE Act lifts the restriction on Traditional IRA contributions once an individual reaches the year in which they turn 70 ½. For decades, taxpayers were precluded from contributing to IRAs (except for Roth IRA) once they turned 70 ½. However, as life expectancy increased, it became unfair to those who are still part of the workforce in their early 70s, as they were foreclosed from contributing to their retirement accounts. Thus, starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.
Required Minimum Distribution Age Raised from 70½ to 72
Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.
For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date (i.e. those born after July 1st, 1949), the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72. For those born before July 1, 1949, nothing has changed for this or any subsequent years, and they should be taking RMDs as previously advised.
Partial Elimination of Stretch IRAs
For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary's life or life expectancy (in the IRA context, this is sometimes referred to as a "stretch IRA").
However, for deaths of most non-government plan participants and IRA owners, beginning in 2020, distributions to most nonspouse beneficiaries are now generally required to be distributed within ten years following the plan participant's or IRA owner's death. So, for those beneficiaries, the "stretching" strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
Qualified Charitable Distributions from IRAs: Change for Late Givers
The SECURE Act also contains an anti-abuse rule that coordinates post-70 ½ deductible Traditional IRA contributions with Qualified Charitable Distributions (QCDs). Under the rule, any QCD will be reduced by the cumulative amount of total post-70 ½ deductible Traditional IRA contributions. This effectively ensures that individuals don’t just ‘recycle’ post-70 ½ IRA contributions into subsequent QCDs. That said, taxpayers under the age of 70 ½ can still fund IRAs with pre-tax dollars and then “convert” RMDs into charitable contributions after turning that age, without having to include the donated portion in their AGI.
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