A few weeks ago, I blogged about the IRS rules for Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Well, throw that one out. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “Secure Act”) was signed into law. The Secure Act changed several important aspects of IRA distributions and contributions.
One thing hasn’t changed. The new tax law still doesn’t allow untaxed retirement money to remain untaxed indefinitely. RMDs, inherited IRAs and other distribution rules are intended to make sure that Uncle Sam gets his share of taxpayers’ pre-tax retirement savings. The Secure Act changes the timing of when Uncle Sam gets his share.
Here are three major changes from the Secure Act that should you know, even if you aren’t close to retirement age:
- Required Minimum Distribution (RMD) Age Increase
Under prior tax law, RMDs had to begin no later than April 1 following the year in which a person turned age 70½. For taxpayers who were not already age 70½ by December 31, 2019, the age to start taking RMDs is extended to 72. Distributions don’t have to be postponed to 72; it’s just an option. What’s better – waiting or not – depends on individual circumstances.
- Contribution Age Restrictions Repealed
Before the Secure Act, workers over age 70½ were not eligible to make contributions to an IRA. That contribution age limit has been eliminated. Yea! Slight damper on that celebration, though – the same rules about who can and cannot deduct a traditional IRA contribution apply, regardless of age.
- Inherited IRA “Stretch Distributions” Eliminated for Non-Spouses
Traditional IRAs that are inherited by someone other than the owner’s spouse can no longer be distributed over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This new rule eliminates the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.
Tax rules are always changing. The December 2019 Secure Act changed several rules about taking distributions from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Sure¸ taxpayers still can’t allow untaxed retirement money to remain untaxed indefinitely. Conversely, the repeal of the age limit on IRA contributions and other changes could positively impact how retirement distributions are taxed.
Need help figuring out the new rules? Get detailed tax advice that fits your situation from a qualified tax professional. You can find one near you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.