Insightful Investing | Happy New Year! There are new tax laws to absorb
Last updated 1/15/2020 at 12:53pm
Below is the content of an article written by Sarah Brenner, JD, and published by Ed Slott and Company, LLC. He is a frequent guest on PBS and trains professionals like myself in the finer aspects of IRA and retirement accounts. Rather than re-write this article, I have gotten permission to share it with you in its entirety.
Like every other tax law, it is a bit dry, but in this case, you need to know these things as it relates to your retirement accounts.
A $1.4 trillion year-end spending bill was signed into law on Dec. 20, 2019, in order to keep the government running. Tucked away inside this mammoth piece of legislation is the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became effective Jan. 1, 2020.
This new law includes significant changes to retirement accounts, including:
Age limit eliminated for traditional IRA contributions
Beginning in 2020, the new law eliminates the age limit for traditional IRA contributions (formerly 70 ½). Now, those who are still working can continue to contribute to a traditional IRA, regardless of their age.
RMD age raised to 72
The SECURE Act also raises the age for beginning RMDs to 72 for all retirement accounts subject to RMDs. IRA owners reaching age 70 ½ in 2020 catch a break and will not have to take their first RMD in 2020 now that the RMD deadline has been extended to age 72.
New exception to the 10% penalty for birth or adoption
The SECURE Act adds a new 10% penalty exception for birth or adoption, but the distribution is still subject to tax. It is limited to $5,000 over a lifetime. The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).
IRA contributions with fellowship and stipend payments
Additionally, the new law allows taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA (or Roth IRA) contribution.
Employer liability protection for annuities in plans
The SECURE Act provides a safe harbor for employer liability protection for offering annuities in an employer plan. This is expected to open the door for more annuity products to be available as investment choices in employer plans.
Goodbye, stretch IRA
Beginning for deaths after Dec. 31, 2019, the stretch IRA is replaced with a 10-year rule for the vast majority of beneficiaries. The rule requires accounts to be emptied by the end of the 10th year following the year of death. There are no annual RMDs. Instead, the only RMD on an inherited IRA is the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules would remain in place.
There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over life expectancy. These include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than 10 years younger than the IRA owner.
The new rules mean a new landscape when it comes to retirement and estate planning. How will they affect you? You may have some new opportunities to make IRA contributions or be able to access your retirement funds without penalty. You may be able to delay taking RMDs a little bit longer. You will also want to give some serious consideration to how the elimination of the stretch will impact you. Reviewing your beneficiary designation form is a good place to start.
Copyright © 2020, Ed Slott and Company, LLC Reprinted from The Slott Report, December 18, 2019, with permission. https://www.irahelp.com/slottreport/hello-secure-act-good-bye-stretch-ira Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Jeffrey Moormeier is a Mukilteo-based financial advisor affiliated with City Fiduciary Group. His column does not represent the opinions of City Fiduciary Group, nor is it an official prediction or recommendation of any kind. The opinions expressed in this column are generalizations. For advise catered to your specific financial circumstances, contact Jeff directly at [email protected] or 425-931-8898.