On January 1, 2020, the Secure Act will take effect which will include five significant changes in the rules and regulations for IRA’s.
Massachusetts Income Tax (and the MA IRA Withholding) Rate Drops to 5.00% on January 1, 2020
Previously approved by the House of Representatives, the Senate passed this legislation on Thursday December 19th. President Trump then signed it into law late Friday December 20th.
Thus the SECURE Act is set to become effective on January 1, 2020.
The SECURE Act includes five significant changes to IRA Rules and Regulations:
Age Limit Eliminated for Traditional IRA Contributions – Beginning for Tax Year 2020 and beyond, the new law eliminates the age limit for Traditional IRA contributions (formerly age 70½). Thus as with a Roth IRA, those with eligible earned income can continue to contribute to a Traditional IRA regardless of their age.
RMD Age Raised to 72 – The SECURE Act increases the age for commencing RMDs to age 72. IRA owners reaching age 70½ after December 31, 2019 will not have to take their first RMD until the year in which they attain 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. The distribution is still subject to tax. It is also limited to $5,000 over a lifetime. But the birth or adoption distribution amount can be re-contributed back at any future time
IRA Contributions with Fellowship and Stipend Payments – Additionally, the new law allows taxable non-tuition fellowship and stipend payments to be treated as eligible compensation to qualify for IRA contributions.
Most Importantly…The “Stretch IRA” Disappears for Many – Beginning for deaths after December 31, 2019, the “Stretch IRA” rules will be replaced with a “Ten Year” distribution rule for most IRA beneficiaries. The rule will require accounts to be emptied by the end of the tenth year following the year of death of the IRA owner. There will be no requirements for annual Beneficiary RMDs as currently exist. The only RMD required of a Beneficiary of an Inherited IRA will be the full Inherited IRA balance being withdrawn by the end of the 10th year after the IRA owner’s death. But for deaths in 2019 or in prior years, the old Beneficiary RMD “Stretch IRA” rules will remain in place.
There are five categories of “eligible designated beneficiaries” who will be exempt from this new 10-year post-death payout rule and who can still use the existing Stretch RMD rules over their life expectancy. These are:
- surviving spouses
- minor children
- disabled individuals
- the chronically ill, and
- beneficiaries not more than ten years younger than the IRA owner
This change will require new decisions in estate planning for many IRA owners.