New Tax Law Changes Rules for IRAs and RMDs

Arthur Stein |

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) became effective January 1. The new law makes significant changes for some IRAs, 401Ks, TSP and 529 plan participants and in other areas. Relevant changes include:

  1. Raising the age to begin Required Minimum Distributions (RMDs) from 70.5 to 72.0;
  2. Repealing the age 70 limit for making contributions to Traditional IRAs; and
  3. Changing the minimum payout provisions for Inherited IRAs from expected lifetime to ten years.

For those affected, the first two changes are positive and the last one negative.

The information above and below is not meant as tax advice. Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice.  For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.

RMDs

Required Minimum Distributions (RMDs) now begin the calendar year when a taxpayer turns 72 instead of 70.5. This allows taxpayers to keep funds in tax deferred accounts for a slightly longer period.

If you were 70.5 last year, you still must withdraw RMDs for 2019 and 2020.

The IRS Table used to calculate RMDs did not change for this year. However, the Table will change in 2021. Withdrawals will be slightly lower as a result. The Single Life Expectancy Table (which is used by beneficiaries of inherited retirement accounts to calculate their distributions) will also change in 2021.

The new rules do not affect the ability of IRA owners to make Qualified Charitable Distributions (QCDs) once they reach 70.5. For an explanation of QCDs, see Tanya’s article here.

Age 70 Cut-Off for Traditional IRA Contributions

Previously, taxpayers older than 70 could not contribute to a Traditional IRA, even if they were still working. That age limit was repealed and contributions can be past age 70.

As before, Traditional IRA contributions can only be made for those who have earned income. Earned income includes wages, salaries, commissions and net earnings from self-employment. It does not include Social Security, pensions or withdrawals from tax deferred accounts. For 2020, the contribution limit for IRAs is $6,000 plus an additional $1,000 catch up provisions for those age 50 or older.

Inherited IRAs

Inherited IRAs are IRAs inherited by a non-spouse. Beneficiary IRAs are IRAs inherited by a spouse.

Before these changes, Inherited IRA withdrawals could be made over the recipient’s expected lifetime. Expected lifetime would depend upon facts and circumstances. This was called “stretching” an IRA.

Now, all funds in Inherited IRAs must be withdrawn ten years after the year of death. However, if the IRA owner died in 2019 or earlier, the previous rules apply and the account can be stretched.

This may be a problem for IRAs listing a Trust as Beneficiary, depending on the wording of the trust. Consult your tax advisor.

There are exceptions to the new distribution rule, including spousal, disabled, chronically ill and certain other beneficiaries. Governmental plans, such as the Thrift Savings Plan and plans sponsored by state and local governments are not impacted until January 1, 2022.

There has been no change in the provisions for Beneficiary IRAs.

Conclusion

Consult your tax advisor if you think you will be affected by any of these changes.

Notes:

This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time. Any information provided in this presentation has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation. Past performance is no guarantee of future performance. Investments involve the risk of loss of principal and earnings. “Average annual return” evens out variations in the actual year-to-year returns. Circumstances differ among individuals and they should not assume that these generalizations or information apply to them. Investments mentioned may not be suitable for all investors.Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice.  For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.