Significant IRA changes for 2020 includes new contribution and distribution rules

Congress recently passed a law that includes important changes impacting IRAs.

Signed into law on December 20, 2019, the following are key changes from the SECURE Act (Setting Every Community Up for Retirement Enhancement) taking effect this year:

Minimum Required Distribution Changes

• Required beginning date increased from 70 ½ to 72
  This change only applies to individuals who attain age 70½ after 12/31/19, so if your required beginning date was in 2019 or earlier under the old rule, the old rule still applies even if you are not yet 72.
• Stretch IRAs Curtailed
  Most non-spouse ROTH and IRA beneficiaries must withdraw their account balances within 10 years of the account holder’s death (versus ‘stretching out’ the tax deferral advantages by taking distributions over the beneficiary’s life or life expectancy). One benefit, however, is that the beneficiary can take a lump sum or spread out the distribution within the 10 years. There are some exceptions, however, for certain “eligible designated beneficiaries” who are not spouses, such as the account holder’s minor children, who have different rules. Note: Inherited IRAs from owners who died before 2020 continue to apply the old rules.
  • Potential “See-Through Trusts” issues: The new rules present complex problems for “See-Through Trusts,” which are named beneficiaries of IRAs after the effective date. Check with your estate planner, who may need to await IRS guidance because there is some ambiguity as to how the new rules apply.

Contribution Changes

• Repeals the maximum age for traditional IRA contributions, which was 70½
  Beginning 2020, there is no longer an age limit for contributions to traditional IRAs. Contributions can be made at any age if the individual has compensation, which generally means earned income from wages or self-employment. Additionally, making a deductible contribution after age 70½ may reduce the maximum allowable Qualified Charitable Distribution (i.e. “QCD” max currently $100,000).
  •  The age for QCDs remains at 70½.
  • There still is no age restriction on Roth IRA contributions
  • This change applies to 2020 and beyond, so those age 70½ cannot make a 2019 contribution to a traditional IRA in 2020 for 2019.

Other changes

• Ability to withdraw up to $5,000 penalty-free from retirement plans for qualified birth or adoption expenses.
• Taxable non-tuition fellowship and stipend payments count as compensation for IRA purposes.
• Non-deductible IRA contributions are allowed with certain foster care payments.

There are technical requirements and fine print not discussed in this article with regard to all of these provisions, therefore, we urge you to consult your tax advisor for the most current guidance before taking any action concerning the SECURE Act changes.