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New Year, New Traditional IRA Rules

2/6/2020 - By Constance O'Donnell

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) has been a hot topic these past few months. The Act, which was signed on December 20, 2019, included many new traditional IRA rules and repeals that you should be aware of. 

Required Minimum Distribution Age Increased to Age 72

For those of you who are creeping up on age 70, there is great news regarding the required minimum distributions (RMD) from your traditional IRAs. The SECURE Act raises the age at which RMDs must be taken from IRAs from 70½ years to 72 years. Those taxpayers will not be required to take a mandatory distribution until April 1 of the year following the year in which they turn 72. This change only applies to those taxpayers who will reach 70½ years AFTER December 31, 2019. If you have reached 70½ years on or before December 31, 2019, you are grandfathered into the old RMD rules.

Repeal of Maximum Age to Make IRA Contributions

An additional provision of the SECURE Act allows taxpayers with earned income to continue to make Traditional IRA contributions after age 70½. Formerly, these contributions were not allowed for years after the taxpayer had attained age 70½.

In connection with the age repeal, taxpayers who make Qualified Charitable Deductions (QCD) must reduce the QCD exclusion by all deductible contributions to an IRA made for years ending after December 31, 2019. QCDs permit taxpayers to distribute to a charity up to $100,000 from their traditional IRA which reduces the amount of their RMD included in taxable income.

New Penalty Exception for Early Withdrawals Related to Birth & Adoption Expenses

A new exception to the 10% early distribution penalty has been approved. Withdrawals up to $5,000 are permitted from your IRA after December 31, 2019, to cover expenses related to the birth or adoption of a child without incurring the 10% penalty. The withdrawal must take place within a one-year period beginning on the date the child is born or the legal adoption is finalized.

Repeal of “Stretch IRA” Inherited

The act repealed the so-called “stretch IRA.” The stretch IRA was a popular estate planning tool. The way the stretch IRA worked was the accountholder would designate a young non-spouse beneficiary, such as a grandchild. Non-spouse beneficiaries were allowed to draw from the IRA based on their life expectancy, potentially spreading the payments out over many decades. Under the SECURE Act, most of those who inherit an IRA will be required to distribute the entire balance within 10 years of the death of the accountholder. There is an exception for a new class of beneficiaries called “eligible designated beneficiaries,” who may still withdraw the assets over their life expectancy rather than the new 10-year rule. Eligible designated beneficiaries include surviving spouses, disabled or chronically ill heirs, and minor children. The 10-year rule will apply when the minor child reaches the age of majority, requiring assets to be paid out by age 28. This provision is generally effective for accountholders who die after December 31, 2019. Taxpayers may want to review the named beneficiaries of their IRAs and revisit their estate plans.

Continuing 401(k) Rules for Older Employees

And finally, a reminder of a continuing provision.  For taxpayers who are 70½ years but continue to work for the employer that holds their 401(k) plan, no annual RMD is required.  This allows the employee to contribute to their 401(k) retirement plan without the RMD requirements and reduces the number of years that their savings or retirement need to last. As the population continues to live longer, these new rules make continuing in the workplace more attractive to older Americans.  

Do you need help navigating these new rules? If so, contact your Saltmarsh representative or a member of our Tax Consulting team to discuss the details of your tax situation and how these new rules may impact you.

About the Author | Constance O’Donnell
Connie is a senior in the Tax & Accounting Services Department of Saltmarsh, Cleaveland & Gund. Prior to joining Saltmarsh in December 2014, Connie worked with a local CPA and consulting firm performing a variety of tax and accounting functions for business and personal clients, including preparation of corporate, non-profit and individual tax returns. She began her career in public accounting in 1993. 

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