The Setting Every Community Up for Retirement Enhancements (SECURE) Act increases saving opportunities for Americans. The SECURE Act contains 29 separate provisions, many of which became effective January 1, 2020. Below is a summary of some of the more substantial changes.
TOPIC | PRE-SECURE ACT LAW | NEW LAW | PLANNING CONSIDERATIONS |
Age to Begin Required Minimum Distributions (RMDs) | By April 1 of the year after reaching age 70 ½. | By April 1 of the year after reaching age 72. |
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Beneficiary Payouts for IRAs and Retirement Plans “Stretch Provision” |
Prior to 2020, non-spouse beneficiaries could generally elect:
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If an IRA owner/plan participant dies in 2020 or after, a new 10-year rule will apply. The new rule requires the inherited IRA/retirement account to be depleted within 10 years (by December 31 of 10th anniversary of death). Exceptions include spouses, minors, disabled or chronically ill individuals, and non-spouse beneficiaries that are no more than 10 years younger than the deceased. Once a minor reaches the age of majority, the 10-year rule begins. |
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Traditional IRA Contribution Age Limit | Traditional IRA contributions were no longer allowed starting in the year an individual reached age 70 ½. | Beginning in 2020, traditional IRA contributions are allowed at any age, as long as the account owner (or spouse if married filing jointly)has earned income. |
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Compensation for IRA Contributions | Earned income (such as salary, wages, commissions, and income from self-employment), as well as nontaxable combat pay, or taxable alimony was required to make an IRA contribution. | In addition to the forms of compensation previously mentioned, taxable stipends, non-tuition fellowship pay, and tax-exempt “difficulty of care” payments may be used to contribute to an IRA beginning in 2020. |
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Penalty-Free Withdrawals for Birth or Adoption of Child | IRA/retirement plan distributions were generally taxable as ordinary income and subject to a 10% early withdrawal penalty prior to age 59 ½. Certain penalty exceptions may have applied. | Allows a $5,000 penalty-free IRA/retirement plan withdrawal to cover expenses related to the birth or adoption of a child. |
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529 Plan Eligible Expenses | 529 Plan funds could be distributed tax-free to cover qualified higher education expenses (undergraduate or graduate), such as tuition, books, and room and board. Additionally, funds could be used to pay up to $10,000 of K-12 tuition costs per year (subject to state law). | In addition to the tax-free distributions previously mentioned, 529 Plan funds may be distributed tax-free to pay for registered apprenticeships. 529 Plan funds may also be used to pay down student loans (subject to a lifetime limit of $10,000). |
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Kiddie Tax Calculation | As of January 1, 2018, under the Tax Cuts and Jobs Act (TCJA), a child’s net unearned income in excess of specified levels was taxed according to the tax brackets used for estates and trusts. | Beginning in 2020, a child’s net unearned income in excess of specified levels is taxed at the parents’ tax rate if higher than the child’s tax rate. This reverts back to pre-TCJA rules. |
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This information is for educational purposes only.
Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.
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