If you save for retirement with an IRA or another plan, new changes signed into law at the end of 2019 could impact your accounts moving forward.
The U.S. Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late December — the first significant retirement-related legislation since the Pension Protection Act of 2006.
Here are the four biggest changes:
The maximum age for making traditional IRA contributions is repealed. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA as long he or she has compensation, which generally means earned income from wages or self-employment.
The required minimum distribution (RMD) age was raised. Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. Under the new law, the age is raised to 72 — but only for those individuals who turned 70½ on or after Jan. 1, 2020.
Note: Individuals who reached age 70½ during 2019 will still have to begin taking their RMDs by April 1, 2020, and continue taking subsequent RMDs by Dec. 31 of each year thereafter.
This change adjusts the age to account for increased life expectancies — the first modification since the 70½ threshold was applied in the early 1960s.
“Stretch IRAs” were partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) 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. This is sometimes called a “stretch IRA.”
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, the stretch strategy is still allowed for:
- the surviving spouse of a plan participant or IRA owner
- a child of a plan participant or IRA owner who hasn’t reached the age of majority
- a chronically ill individual
- any other individual who isn’t more than 10 years younger than a plan participant or IRA owner
Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.
Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, unless an exception applies, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, however, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child can be made penalty-free (but will still be taxed accordingly). The $5,000 amount applies on an individual basis. Therefore, each spouse in a married couple may receive a penalty-free distribution up to $5,000 for a qualified birth or
These are only some of the changes included in the new law. If you have questions about your particular retirement plan, contact a KraftCPAs advisor.