Congress recently passed-and the President signed into law-the SECURE Act, landmark legislation that may affect retirement planning. 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 situations.
Repeal of the maximum age for traditional IRA contributions.
Before 2020, traditional IRA contributions were not allowed once the individual attained age 70%. 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.
Required minimum distribution age raised from 70.5 to 72.
Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70%. The age 70% requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.
For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70% after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70% to 72.
Partial elimination of stretch IRAs.
For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary's life or life expectancy (in the IRA context, this is sometimes referred to as a "stretch IRA").
For deaths of plan participants or IRA Owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant's or IRA owner's death. So, for those beneficiaries, the "stretching" strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
Marc has 36 years in financial services and 6 years in teaching.
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