SECURE Act Brings Immediate Changes to IRAs
By Christle Johnson, QKA, CIP
A law enacted in December 2019 makes several changes to retirement savings plan rules, and the key changes affecting IRAs already went into effect on January 1, 2020. The Further Consolidated Appropriations Act, 2020 (FCAA), which includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was enacted just 11 days before the start of 2020. This has put financial organizations and other industry partners in a whirlwind trying to comply with the requirements as soon as possible.
A brief overview of some of the changes affecting IRAs follows. Watch for upcoming articles with more details about these changes affecting IRAs and employer-sponsored retirement plans.
Traditional IRA Contributions at Any Age
The SECURE Act repealed the age restriction for IRA contribution eligibility. Effective for 2020 and later taxable years, individuals with earned income can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Note that an individual who turned age 70½ or older in 2019 cannot make prior-year contributions for 2019, even though the contribution deadline is April 15, 2020.
More Rapid Payouts to Certain Nonspouse Beneficiaries
Most nonspouse beneficiaries who are more than 10 years younger than the IRA owner must distribute the inherited IRA assets within 10 years of the IRA owner’s death; they can no longer stretch IRA payments over their own life expectancies. This took effect on January 1, 2020, and applies to Traditional, Roth, and savings incentive match plan for employees of small employers (SIMPLE) IRAs, and to employer-sponsored retirement plans. Note that the beneficiary options for deaths in 2019 or before are not affected.
Exceptions to the 10-year rule generally include those who, at the time of the account owner’s death, are
spouses,
disabled,
chronically ill,
beneficiaries not more than 10 years younger than the account owner,
minors of the decedent (they would begin a 10-year payout period upon reaching the age of majority), nonpersons, and
recipients of certain annuitized payments begun before enactment of the SECURE Act.
Delayed Age for RMDs
The age when required minimum distributions (RMDs) from Traditional (and SIMPLE) IRAs must begin increased from age 70½ to age 72, effective January 1, 2020. Thus, IRA owners born on or after July 1, 1949, are not required to begin RMDs until the year they reach age 72; their required beginning date is April 1 of the year following the year they turn age 72.
Birth and Adoption Exception
The birth or adoption of a child (or certain individuals incapable of self-support) qualifies as an amount that is exempt from the 10 percent early distribution penalty tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs, defined contribution retirement plans under 401(a), 403(b) plans, and governmental 457(b) plans. This limit applies to each birth or adoption event, and excludes the adoption of a spouse’s child (for example, in a blended family situation). Distributions for qualified births and adoptions may be repaid. This provision is effective for 2020 and later taxable years.
Graduate Student IRA Contributions
Certain stipends, fellowships, and similar payments to graduate or postdoctoral students that are includible in income will be treated as eligible compensation for IRA contribution purposes, effective for 2020 and later taxable years.
Qualified Disaster Distributions
The FCAA contains the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which provides disaster relief to individuals affected by presidentially declared disaster areas who receive IRA and retirement plan distributions between January 1, 2018, and 180 days after the date of enactment (December 20, 2019) of this legislation. Qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs are exempt from the 10 percent early distribution penalty tax and the normal withholding requirements. Individuals affected by more than one disaster may distribute up to $100,000 per disaster. Qualified disaster distributions may be repaid within three years, and affected individuals also may repay the distributions taken for cancelled home purchases.
Reduction in Medical Expense Deduction Floor
The FCAA also extends a temporary reduction in the medical expense floor to 7.5 percent for 2019 and 2020 taxable years. As a result, distributions taken from IRAs to pay for unreimbursed medical expenses that exceed 7.5 percent of the individual’s adjusted gross income are not subject to the early distribution penalty tax. If not extended further, this will revert back to 10 percent for 2021.
The SECURE Act’s primary goals were to expand retirement savings, improve plan administration, simplify existing rules, and preserve retirement income. While it seems that some of these changes support those goals, more IRS guidance is needed to explain all of the effects of the changes. So far, the IRS has released one notice (Notice 2020-6), but more guidance is expected.
