The IRS issued news release IR-2020-50, which contains links to several resources that describe changes contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, an element of the Further Consolidated Appropriations Act (FCAA), 2020, signed into law in December 2019. Included is IRS Fact Sheet FS-2020-04, a web page entitled “New law helps people save for retirement; other retroactive changes impact many taxpayers,” as well as links to the latest versions of IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs).
The FS-2020-04 recaps SECURE Act changes that many are already familiar with, but also provides clarity where there was some uncertainty.
Traditional IRA Contributions at Any Age
Persons age 70½ and older may now make contributions to Traditional IRAs for 2020 and later tax years, not including contributions for the 2019 tax year made in 2020.
New RMD Age 72, Not 70½
Prior to the SECURE Act, age 70½ was the age to begin required minimum distributions (RMDs) from non-Roth IRAs and (with some exceptions) employer retirement plans. Now, persons who turn age 70½ in 2020 and later years need not begin RMDs until reaching age 72. Those reaching age 70½ in 2019 or a prior year cannot delay RMDs to age 72.
Qualified Birth or Adoption Penalty Exception
Taxable distributions from IRAs and employer plans before age 59½ are generally subject to a 10 percent excise tax, with limited exceptions. The SECURE Act provides a new exception to the excise tax for a qualified birth or adoption distribution. Up to $5,000 may be distributed from an IRA or employer plan—or both in combination—for the birth or adoption of a child. Such distributions may be recontributed. FS-2020-04 language makes it appear that such recontributions may be made at any time to an IRA or employer plan, and will be treated as rollovers no matter how long after the time of distribution.
More Rapid Payouts for Nonspouse Beneficiaries
Prior to the SECURE Act, all nonspouse primary beneficiaries of IRA or employer-sponsored retirement plan balances had the ability to stretch payouts over their own lifetime. For IRA owner or plan participant deaths in 2019 or earlier years, this option remains in place. But for deaths in 2020 and later years, most nonspouse beneficiaries must deplete the inherited account within 10 years. Exceptions (those still allowed to pay out over their lifetime) include the disabled, those chronically ill, those no more than 10 years younger than the decedent, and minor children. Minor children must begin the 10-year payout period upon reaching the age of majority.
The SECURE Act statutes and FS-2020-04 do not specify an age of majority, which may vary from state to state. However, under the heading, “Retirement Topics—Required Minimum Distributions (RMDs),” at the IRS website, the IRS identifies a uniform age of 18 when this 10-year distribution period must begin. It’s important to note that IRS website postings generally do not provide the same level of reliance as official guidance.
529 Plan Changes
The SECURE Act also created two new qualified—thus, tax-free—withdrawals from qualified tuition programs, also known as 529 plans. This change is retroactive to 2019. Amounts withdrawn from 529 plans may be used to pay for expenses of certain registered and certified apprenticeship programs. Also, up to $10,000—a lifetime limit—may be withdrawn and used to pay student loan principal or interest of the 529 plan’s designated beneficiary or the designated beneficiary’s sibling.