What is the SECURE Act?
SECURE Act Brings Big Changes to Retirement Account Rules
President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law on December 20th, 2019. It becomes effective as of January 1, 2020. It brings sweeping changes, including a later starting age for Required Minimum Distributions, more opportunities for contributing to IRAs, and the end of the stretch IRA strategy for inherited IRAs. Below are details on some of the key provisions.
The SECURE Act Allows Longer Tax-Deferred Growth for IRAs
RMDs (Required Minimum Distributions) to begin at age 72. If you turn age 70 ½ after December 31, 2019, your required distributions from traditional retirement accounts will begin at age 72 instead of age 70 ½. Unfortunately, if you turned 70 ½ in 2019, you must still take your 2019 RMD no later than April 1, 2020. If you are already taking RMDs because you are over 70 ½, you must continue taking your RMDs.
QCDs (Qualified Charitable Distributions) continue for those over 70 ½
QCDs are direct transfers from your IRA to a qualified charity so that the distribution is excluded from your income. The QCD rule that you must be 70 ½ will remain unchanged even though the age for starting RMDs will increase to 72. There may be an impact to your QCD if you make deductible contributions to your IRA after age 70 ½.
Contributions to IRA accounts allowed after age 70 ½ . Beginning in 2020, if you have earned income, you will now be able to contribute to your traditional IRA without any age limitations. If you are married, your spouse can also contribute to an IRA even if they do not have any earned income.
The SECURE Act Permits Students to Use 529 Money to Pay Back Loans
Expanded use for 529 college savings accounts. The definition of a qualified distribution from a 529 college savings has been expanded to include up to $10,000 to repay qualified student loans and expenses for certain apprenticeship programs. This provision of the SECURE Act is retroactive to distributions made after December 31, 2018.
New Moms and Dads Get Penalty-Free Withdrawals from Retirement Accounts
Penalty-free withdrawals for birth or adoption expenses. Beginning in 2020, parents can withdraw up to $5,000 from a retirement account within one year of the child’s birth or adoption. You will owe taxes on the distribution, but the usual 10% penalty for account owners younger than 59 ½ will be waived.
The SECURE Act Eliminates Stretch IRA for Inherited IRA Accounts
Inheritors must take more care with tax planning when taking distributions. There are no changes for anyone who inherited an IRA from the original owner who passed away before January 1, 2020. However, if the original IRA owner passes away after December 31, 2019, most beneficiaries will need to withdraw all assets from the inherited IRA within 10 years following the death of the IRA owner instead of spreading required distributions over their own lifetimes. This provision applies to both traditional and Roth IRA accounts. There are exceptions for spouses, minor children (until they reach the age of majority), disabled individuals, and beneficiaries who are less than 10 years younger than the decedent.
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