New Decade – New Tax Law. Once again, Congress passed a major piece of legislation as they headed out the door for the Holiday last month. Congress passed “The Setting Every Community Up for Retirement Enhancement Act”, better known as the SECURE Act. The SECURE Act — the most impactful retirement plan legislation since the Pension Protection Act of 2006 — was included in the bipartisan spending bill signed by U.S. President Donald Trump on December 20, 2019. These changes became effective on January 1, 2020.
Here are the major changes created by the new law which you should be aware.
- Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½: Starting January 1, 2020, you will need to start withdrawing money from their traditional Individual Retirement Account (IRA) at age 72, a change from the current withdrawal requirement of age 70½.
BEWARE: If you turned 70½ in 2019, then you will still need to take your RMD for 2019 no later than April 1, 2020. If you are currently receiving RMDs (or should be) because you are over age 70½, you must continue taking these RMDs. Only those who will turn 70½ in 2020 or later may wait until age 72 to begin taking required distributions.
- Clients Can Contribute to Their Traditional IRA After Age 70½: Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year they turn 70½ and beyond, provided you have earned income.
BEWARE: You still may not make 2019 (prior year) traditional IRA contributions if you are over 70 ½.
- Inherited Retirement Accounts: Upon death of the account owner, distributions to individual beneficiaries must be made within 10 years. The important exceptions are for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. These exceptions allow for the money to stay in the tax deferred account with the required RMD’s.
Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.
Heirs are now required to take the money out of the tax-deferred account over 10 years (or at the end of 10 years), pay income taxes and then have the net amount to save or spend. The remainder can be invested, but it would no longer have tax-deferment. The big tax difference is heirs – instead of taking the money out of their lifetimes – are now required to take the money out in 10 years.
The new distribution rules are effective for accounts of individuals who die after December 31, 2019.
- Adoption/Birth Expenses: The new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses, up to certain limits.
Please see your tax advisor for more information and how the changes may impact you financial situation.
Hope you have a great week!
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