This year will see the most significant changes to individual retirement accounts (IRAs) in more than a decade.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, both recently signed into law by President Trump, are intended to help Americans save more for retirement and provide relief for individuals affected by the coronavirus (COVID-19) pandemic.

Following is a summary of the major IRA provisions.

The SECURE Act provisions are designed to help expand retirement savings options and preserve retirement income.

Age restriction eliminated

Starting in 2020, taxpayers with earned income may make contributions to traditional IRAs at any age. Previously, traditional IRA contributions could no longer be made starting in the year the taxpayer reached age 70½.

This SECURE Act provision is effective for 2020 and later tax years, and is not retroactive. This means IRA owners age 70½ or older in 2019 cannot make prior-year contributions for 2019 in 2020, as they fall under the old eligibility rule.

This change brings the rules for traditional IRAs more in line with Roth IRAs, which have never had an age restriction for making contributions.

Payout provision

Starting with IRA owner deaths in 2020, most nonspouse beneficiaries who are more than 10 years younger than the IRA owner must distribute their inherited IRA assets within 10 years of the IRA owner’s death.

Previously, these beneficiaries could take payments from their inherited IRAs over their own life expectancies, which meant that beneficiaries in their 20s and 30s could stretch out their payments (and the taxes due on them) for 50 or more years.

There are exceptions to the 10-year payout rule for beneficiaries who, at the time of the IRA owner’s death, are:

• Married to the IRA owner
• Disabled
• Chronically ill
• No more than 10 years younger than the IRA owner
• Minor children of the IRA owner
• Recipients of certain annuitized payments begun before enactment of the SECURE Act

The exception for the IRA owner’s minor children does not apply to minor beneficiaries who are not the IRA owner’s own children. Once the IRA owner’s minor children reach the age of majority, they must switch to the 10-year payout period.

This 10-year payout provision applies to distributions from traditional IRAs, Roth IRAs, and savings incentive match plan for employees of small employers (SIMPLE) IRAs. It also is not retroactive, so the beneficiary payment options for IRA owner deaths in 2019 or earlier remain unchanged.

‘SECURE Act provisions are designed to expand retirement savings options and preserve retirement income.’

Dennis Zuehlke

Required minimum distributions

The SECURE Act increased the age at which required minimum distributions (RMDs) from traditional IRAs and SIMPLE IRAs must begin from 70½ to 72. This provision is effective for distributions required to be taken in 2020 and later years by IRA owners who reach age 70½ in 2020 and later years.

This provision also is not retroactive, so IRA owners who reached age 70½ in 2019, and have already begun taking their RMDs, must continue to take them.

However, these IRA owners are not required to take RMDs in 2020 because the CARES Act waives all 2020 RMDs.

Penalty-free withdrawal exception

The SECURE Act now permits penalty-free IRA withdrawals for the birth or adoption of a child.

A “qualified birth or adoption” distribution is exempt from the 10% early distribution penalty tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution retirement plans, 403(b) plans, and governmental 457(b) plans, per individual.

The $5,000 limit applies separately to each birth or adoption. A qualified adoptee is anyone (other than a child of the taxpayer’s spouse) under age 18 or an individual who is incapable of self-support.

“Qualified birth or adoption” distributions may be repaid at a later date as rollover contributions to IRAs and eligible retirement plans (other than defined benefit plans).

IRA contributions by graduate students

Effective for 2020 and later years, certain stipends, fellowships, and similar payments to graduate and postdoctoral students will be treated as eligible compensation for IRA contribution purposes.

Previously, because some of these types of payments were not considered eligible compensation, graduate students were not able to make IRA contributions unless they had compensation from other sources.

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