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Just before recessing for the holidays, the House and Senate passed the Consolidated Appropriations Act 2020, which averted a government shutdown that would have begun on December 21, 2019. This legislation included the Setting Every Community Up for Retirement Enhancement act (the “SECURE Act”), which makes several important changes to the rules for retirement savings and employer retirement contributions. President Trump signed this bill into law on December 20, 2019.
The SECURE Act legislation may affect how you plan for your retirement. 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 and retirement-planning situation. Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals:
Repeal of the maximum age for traditional IRA contributions: Before 2020, traditional IRA contributions were not allowed once the individual reached age 70½. 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, it had not been adjusted to account for increases in life expectancy. Under the new law, for distributions required to be made after December 31, 2019, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
Partial elimination of “stretch IRAs”: For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spouse and nonspouse) of those accounts were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”). However, for deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspouse beneficiaries are generally required to be distributed within 10 years following the plan participant’s or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed. Limited exceptions to the 10-year rule are available, including distributions to a surviving spouse, a minor child, or a chronically ill individual.
Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child: Generally, a distribution from a retirement plan must be included in income. And unless an exception applies (for example, distributions in case of financial hardship), a distribution before age 59-1/2 is also subject to a 10% early withdrawal penalty on the amount includible in income. Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes: Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and therefore could not be used as the basis for making IRA contributions. Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.
Please contact us if you need more information about any of the topics above.
The Marston Group, PLC
January 2020
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