The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law on December 20, 2019.  The Act contains major retirement related provisions aimed at expanding retirement savings.  The provisions apply to both employers and to individuals, and will have wide-ranging impact on both retirement planning and estate planning.

This article will focus on the changes that apply to individuals and their IRA accounts.

RMD Age Change

The SECURE Act changes the starting age for individuals to take Required Minimum Distributions (RMDs) from age 70 ½ to age 72.  The change applies to individuals who turn 70 ½ after 12/31/2019.

IRA Contributions after 70 ½

The SECURE Act has repealed the rule that prohibited traditional IRA contributions after age 70 ½.  Now, taxpayers may make deductible contributions to their IRA accounts at any age, as long as they have earned income (wages or self-employed income).  In an era where Americans are working past traditional retirement age, this will give older workers an opportunity to add some cushion to that nest egg.

Charity from IRA

The Act does not change the starting age to make charitable contributions directly from IRA accounts.  This benefit is still allowed after reaching the age of 70 ½, even though the RMD age has changed to 72.  The IRA to charity withdrawals have become popular because they count toward the RMD that may be required, without adding that withdrawal to income.

After the SECURE Act, taxpayers may now be making charity contributions directly from an IRA, and also making tax deductible contributions to IRA accounts at the same time.  With this in mind, the Act now requires if a deductible IRA contribution has been made after the taxpayer turns 70 ½, the amount of charity from IRA income exclusion must be reduced by this amount.  In other words, part of the charity that was paid directly from an IRA account may need to be included in income in this scenario.

Inherited Retirement Plans

For those inheriting an IRA or other qualified plan, the SECURE Act no longer allows non-spouse beneficiaries to take distributions from the plan over their own life expectancy.  Instead, the Act now requires that all funds from an inherited IRA must be distributed to non-spouse beneficiaries within 10 years of the plan owner’s death. This new rule applies for deaths of plan owners occurring after 12/31/2019.

If the beneficiary is the spouse of the account owner, the 10-year distribution rule does not apply.  Other exceptions apply if the beneficiary is a minor, disabled, chronically ill, or not more than ten years younger than the deceased plan owner.

Consider how your trust and estate planning may need to change now that the inherited IRA must be withdrawn within 10 years of death. For a younger beneficiary, this may mean reporting IRA income much earlier, potentially decades earlier, than previous planning intended.

Withdrawals for Birth or Adoption

The SECURE Act allows you to withdrawal up to $5,000 following the birth or adoption of a child.  The withdrawal will be subject to income tax, but will not be subject to the 10% early-withdrawal penalty.  The $5,000 limit is per individual, so each spouse may take that amount from his or her own account without penalty.

The penalty still applies if you are adopting your spouse’s child.

Compensation for Calculating IRA Contributions

Contributions to IRA accounts generally cannot be more than your earned income.  The SECURE Act allows amounts paid to graduate and post-doctoral students, such as fellowship and stipend payments, to be treated as compensation for purposes of calculating IRA contributions.

The Act also allows home healthcare workers to treat exempt Difficulty of Care payments as earned income for purposes of calculating IRA contributions.

These are only highlights of the changes the SECURE Act makes that effect individuals and their IRA accounts.  These changes make it an opportune time to revisit your retirement and estate planning and make any updates that may be necessary as a result of the new rules.

The Act also makes changes to employer plans which we will cover in subsequent articles.