On December 20, 2019, the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was signed. In addition to that legislation, The Further Consolidated Appropriations Act passed on December 24, 2019, containing tax provisions addressing expiring tax credits and other tax issues. This month, I focus on the SECURE act changes.
SECURE Act Highlights
IRAs for workers over 70.5 years old. The age limit to contributing to traditional IRAs has been repealed beginning January 1, 2020. Prior to this act, people who turned 70.5 years old before the end of a year were not eligible to contribute to an IRA for that or later years, even it they otherwise would have qualified. That provision had been repealed from January 1, 2020 forward.
Donating directly from IRAs to charities. If you are 70.5 or older, you can donate up to $100,000 per year to qualifying charities and exclude that distribution from income and also still count it to help cover your Required Minimum Distribution (RMD) — also see later about RMD age. But the SECURE Act allows you to keep working and contribute to IRAs past the year you turn 70.5 (see above). A caveat to this is that you may have to reduce the excludable amount by the total IRA deductions allowed for all year ending after the date you reach age 70.5 less the total amount of reductions for all tax years preceding the current tax year. Good luck figuring that out. This provision took effect for years beginning after December 31, 2019.
Required minimum distribution age raised from 70.5 to 72 after 2019. If you turn 70.5 after December 31, 2019, you can wait an extra year and a half to start taking RMDs. 70.5 was a very strange age anyway. You can take distributions without the 10 percent penalty after you reach the age of 59.5 (an equally strange age).
Death of stretch IRAs. An increasingly popular estate planning tool has been the ability to set up qualifying individuals as beneficiaries of your IRA and when you pass, they can begin taking distributions over their life expectancies, not yours. Typically, that is a tremendous benefit, which may allows IRAs to effectively be a multi-generational investment vehicle, allowing for tax to be deferred over many years. Well, that’s been repealed by the SECURE Act. While the surviving spouse can still take the distributions over his or her life expectancy, there generally isn’t that great of a difference in age between spouses as there is between the decedent and their children or even their grandchildren. Now, basically, other than your spouse, the maximum deferral is 10 years for IRA owners dying after December 31, 2019. So, if you have a stretch IRA as part of your estate plan, you may want to revisit that issue.
Section 529 plans expanded. Now you can cover registered apprenticeships and distributions to repay student loans of a beneficiary or siblings up to $10,000 lifetime limit for years 2019 and after. These distributions can be used to pay all kinds of expenses (not covered in this column), but could not be used to pay for apprenticeships or student loans in prior years. Now you can.
Penalty-free plan withdrawals for birth or adoption of a child. You may take a penalty-free distribution from “applicable eligible retirement plans” of up to $5,000 per taxpayer. This is effective for years beginning after 2019.
As always, there are numerous rules which may affect your implementation of any of the topics covered in this column, and also as noted, Congress has a sneaky way of passing law changes at the drop of a hat, so please do your research or contact your tax advisor before undertaking any of the strategies mentioned here.