The SECURE Act became law on December 20, 2019. It changes quite a few of the rules relating to retirement plans, but there are really FIVE major changes that effect individuals. Here they are:
- Repeals Age Limit on Traditional IRA Contributions. It used to be that contributions to traditional (non-Roth) IRAs were prohibited after age 70 1/2. Now, an individual can make contributions whenever they want at any age (though they are still subject to the dollar amount contribution limitations).
- Qualified Charitable Distributions Limited. The extra time to make contributions to that traditional IRA does come with a trade off. Now, any deductions taken for contributions to traditional IRAs after age 70 1/2 reduce the IRA owner’s qualified charitable distribution amount. That amount is $100,000 per year and is the amount that if paid to charity from the IRA is not included in the owner’s income.
- Increases Starting Age for Requirement Minimum Distributions (RMDs) to 72, from 70 1/2. When an IRA owner (or the owner of other defined contribution plans, such as 401ks) turns 72, the owner must begin taking RMDs, which are distributions of the account balance over the owner’s life expectancy. The extra year and a half wait allows the account to have more tax-free growth before distributions (which most likely are taxable) must begin. The tax treatment of RMDs is a bit beyond the scope of this post.
- 10-Year Payout Rule For Most Beneficiaries. Any designated beneficiary of an IRA (or other defined contribution plans, like 401ks) that is NOT (1) the owner’s spouse, (2) the owner’s child who is under age 18, (3) a disabled individual, (4) a chronically ill individual, or (5) any other person who is younger than the owner by no more than 10 years, must take the balance of the account out within 10 years of the owner’s death. This means, other than the exceptions 1-5 I just listed, there are no more “stretch” IRAs. The bottom line is that the IRA account balance will need to be withdrawn faster than under the old statute, which means it will be TAXED faster. How trusts fit into the equation is still a little unclear, though it is clear trust that are beneficiaries will not be able to stretch out the IRA payments either. I’ll cover trusts in a separate post.
- Expanded Use of 529 Plans. Now, a 529 Plan can be used to pay up to $10,000 in student loans for the plans beneficiary or a sibling of the beneficiary. A 529 Plan is a college savings plan that allows tax-free investment growth, and tax-free use of the funds if they are for qualified higher education expenses. The total $10,000 that can be used on student loans is now a qualified higher education expense.
- BONUS: No 10% Penalty for Birth or Adoption Expenses. IRAs (and other defined contribution plans, like 401ks) are subject to a 10% tax penalty on withdrawals from the account before the age of 59 1/2. There are many exceptions to this rule (for further reading go here). Now, up to $5,000 can be withdrawn within one year of the owner’s child being born or legally adopted. An adopted child must be under age 18 or physically or mentally incapable of self-support.