You may have read that the SECURE Act made important changes to IRAs and other retirement accounts just a few days before year-end.
But few people understand exactly how the changes will impact their IRA contributions and withdrawals in 2020, and which of those important changes take effect as of January 1, 2020.
There’s a lot packed into the SECURE Act, but let’s start with 2 key updates you need to know about right away.
Change #1: You can now contribute to your Traditional IRA in tax year 2020 and beyond even if you are over age 70½.
A client called us just before the New Year, saying she had to stop contributions to her Traditional IRA in 2020 because she was turning 70½ and was now too old to contribute. “Not any longer,” I told her. “They just changed the rules!”
Now, workers of any age can contribute to a Traditional IRA as long as they (or a spouse) have working income. Of course, whether or not that contribution is deductible depends on income levels, participation in other workplace retirement plans, and other factors.
Why would someone want to keep contributing into their 70s or even 80s? That’s easy. Contributing to a Traditional IRA can be a great way to cut your current tax bill, and many workers – even those working part-time or just a few hours a week – value the opportunity to put aside more for their retirement. That makes this rule change a win for all taxpayers.
Note the enhanced contribution rules only affect tax years after 2019. If you were 70½ or over in 2019, you cannot contribute to a Traditional IRA for 2019, although you can contribute for 2020 and future years.
Change #2: If you are turning 70½ in 2020 or later years, you can now postpone IRA Required Minimum Distributions (RMDs) until you turn 72.
OK, let’s face it, an extra year or two isn’t that big a deal, but it is a step in the right direction. This will help taxpayers delay taxable IRA withdrawals so they can take advantage of a few more years with less income and lower taxes. It will also give retirees a few extra years to squeeze in Roth conversions, and get money out of their retirement accounts while their tax bracket is lower.
If you already started Required Minimum Distributions in 2019 or earlier, nothing will change (sorry!). You need to keep taking your distributions, and the rules will not change for you. (The IRS does hint that it may change longevity tables to require smaller required annual distributions in the future, but those changes are not yet in place.)
If you haven’t started Required Minimum Distributions yet, you’re in luck. For example, someone with a birthdate of October 1, 1949 turns 70½ on April 1, 2020. Under the old rules, they would have started RMDs in 2020, the year they turned 70½. Now, they can postpone RMDs until they turn 72. That will happen on October 1, 2021, effectively pushing back required withdrawals for a year.
If your birthdate is February 1, 1950, you turn 70½ on August 1, 2020. Under the old rules, your RMDs would have been due in 2020. Now, they’re due when you turn 72 on February 1, 2022, pushing back your start date for two years.
The Takeaway: There are many more changes that will affect you and your wealth strategy. Some are truly critical, and not all are positive. Check back here to see these updates addressed in future blog posts. And as always, we’ll be reaching out to clients personally to discuss the new rules and what they need to do now.