The recently enacted SECURE (Setting Every Community Up for Retirement) Act of 2019 allows an increase to the maximum age for traditional IRA contributions. Section 107(a) of SECURE repealed the age cap of 70½ years and allows individuals to make deductible contributions to a traditional IRA past this former age limit.
However, taxpayers must still meet the required IRA criteria to make a qualified IRA contribution including earned compensation and related limits. Additionally, the age at which taxpayers must take a required minimum distribution (RMD) from a qualified plan and IRA is increased from age 70½ to age 72. The effective date of all of the above changes is Jan. 1, 2020.
SECURE expands the definition of “compensation” to include amounts paid to an individual who is obtaining a graduate or post-graduate degree. This includes stipends and other payments related to their non-tuition fellowships that are taxable to the student and may be used as a basis of income for an IRA contribution.
Similarly, health care workers may include in compensation for purposes of calculating IRA contributions difficulty of care payments. The type of payments defined as “difficulty of care” includes compensation paid for providing the care needed for foster individuals that have a physical, mental or other disability as defined by state law. In general, historically these types of payments to taxpayers has been exempt from taxation.
Before SECURE, taxpayers were able to leave IRA assets to beneficiaries including children and grandchildren and “stretch” the tax payments for withdrawals over the lifetime of the beneficiary. Under the new rules, effective for IRA owners who pass away after Dec. 31, 2019, the IRA that is inherited to someone other than the surviving spouse is to be distributed generally by the end of the 10th calendar year following the year of the taxpayer’s death. This would result in accelerated tax payments compared to the former “stretch” option. Eligible beneficiaries that are exempt from the 10-year requirement include the surviving spouse, a minor child, handicapped or terminally ill persons and individuals who are not more than 10 years younger than the taxpayer.
Individuals are able to take penalty-free withdrawals for qualified birth or adoption distributions of up to $5,000 from and IRA, as well as 401(k), 403(b) and 457(b) plans.
Defined benefit plans are excluded. Beginning after Dec. 31, 2019, penalty-free withdrawals by a taxpayer may occur during the one-year period beginning on the date on which a child is born or which a legal adoption would be finalized. Spouses each are subject to their own $5,000 limit. An eligible child is an adoptee who is not the child of the taxpayer’s spouse and has not reached the age of 18 or is otherwise incapacitated. The taxpayer is permitted to roll the amounts back to an IRA in the future.
NTSA experts are able to assist you and your clients regarding important retirement updates under the SECURE Act (H.R. 1865 P.L. 116-94, the Further consolidated Appropriations Act, 2020). You can ask a question by clicking here.
Kimberly Flett is Managing Director, Global Employer Services ERISA National Leader at BDO.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.
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