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Have an IRA? Pay attention to these new tax law provisions

On December 20, 2019 the President signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law.  This law made a lot of positive changes in IRAs and retirement plans.  Below is a summary of the major items that you may want to consider when discussing your taxes with your tax adviser between now and April 15th, 2020.

The following changes are effective as of January 1, 2020:

Changes affecting individuals:

  • No age limit for IRA Contributions. Effective January 1, 2020 anyone of ANY AGE may now contribute to an IRA if they have earned income such as a wage or self-employment. The old rule prohibiting contributions during or after the year turning 70 ½ has been repealed.  FYI: There’s no age restriction on Roth IRA contributions, and the Secure Act does not change that.
  • Later start date for RMD. The date to start Required Minimum Distributions (RMDs) has been changed to age 72 (from age 70 ½), but this only applies to those who did NOT attain age 70.5 by the end of 2019.
  • Possible reduction in Qualified Charitable Distribution (QCD) rules. Individuals who are age 70 ½ and older may elect a distribution of up to $100,000 from their IRA to be donated directly by the IRA trustee to a charitable organization.  This is known as a Qualified Charitable Distribution.  These distributions aren’t included in gross income and can’t be claimed as a deduction (on Schedule A) of the taxpayer’s return.  This election is the same under the old law and new law.

But now that individuals can make IRA contributions beyond age 70 ½, the calculation of the amount of Qualified Charitable Distribution has changed effective for tax years beginning after Dec. 31, 2019. The allowable QCD deduction calculation is somewhat complicated if you funded your IRA after you reached age 70 1/2/ under the rules.   The amount of a taxpayer’s QCD that is excluded from gross income for a tax year is prorated by (1) the total amount of IRA deductions made by the taxpayer for all tax years ending on or after the date he or she attains age 70-1/2, over (2) the aggregate amount of such reductions for all tax years preceding the current tax year. 

  • Inherited IRA – shorter distribution period:  IRAs inherited from people (other than your spouse and a few other exceptions) who passed away after 2019 must now be distributed within 10 years of death. This does not affect situations where the IRA was inherited from someone who died before 2020. The 10-year period applies regardless of whether the plan participant or IRA owner dies before or after reaching the required beginning date. This change eliminates the use of “stretch IRAs”. Instead of being able to stretch RMDs out over the life of a beneficiary, many will have to take all RMDs of a retirement account by the end of year 10 after an account owner passes away. This can result in higher RMDs paid to beneficiaries whom are in their prime working years (and highest tax years). 
  • Penalty free withdrawal for a newborn or adoption.  Up to $5,000 may be withdrawn from a retirement plan without penalty for the birth or legal adoption of a child, for up to one year after birth or adoption. The amount withdrawn is still taxable, but may be redeposited without penalty, and if redeposited within 60 days of withdrawal is not even taxable.

Please contact your Wegner CPA’s tax advisor for strategies to benefit from the provisions of the year-end tax law.

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