Congress recently passed the SECURE Act, landmark legislation that 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 strategies.
Here is a look at some of the more important elements of the SECURE Act that impact individuals. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you can take to minimize their impact.
Repeal of the maximum age for traditional IRA contributions
In the past, an individual age 70½ or older could no longer contribute to a traditional IRA. 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) the individual can continue making IRA contributions.
Required minimum distribution age raised from 70½ to 72
Before 2020, retirement plan participants and IRA owners had to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. That age has now increased from 70½ to 72. The new age requirement applies to individuals who attain age 70½ after December 31, 2019.
Partial elimination of stretch IRAs
For deaths of retirement plan participants occurring before 2020, beneficiaries could stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life. In the IRA context, this is sometimes referred to as a “stretch IRA”.
However, beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries must be distributed within ten years of the owner’s death. So, for those beneficiaries, the “stretching” strategy is limited.
Exceptions to the 10-year rule apply to distributions to the surviving spouse, to a minor child, to a chronically ill individual, and to any other individual who is less than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under these exceptions may take their distributions over their life expectancy (as was allowed under the previous rules).