The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law on December 20, 2019, includes a number of reforms that may impact your personal financial planning. While many of the act’s provisions are aimed at employer retirement plans, the act also makes some major changes to the rules of individual retirement accounts (IRAs) and includes some welcome changes to 529 college savings plans.
The following FAQs highlight some of the key changes with regard to IRAs and 529 college savings plans.
Note that some of the provisions will be subject to future IRS guidance. More information will be provided as it becomes available. You should contact your personal tax advisor to discuss impacts based on your own situation.
Q: IRA owners cannot keep assets in their account indefinitely. They have to start taking withdrawals from their IRA when they reach age 70½. These are called required minimum distributions (RMDs). How does the law impact RMDs?
Q: When are the new RMD rules effective?
A: The new rule is effective for individuals who attain age 70½ on or after January 1, 2020. If an individual reached age 70½ before this date, they are still required to take RMDs even if they are not yet age 72.
Q: I turn 70½ in 2020 and have already sent paperwork to American Funds to begin taking RMD payments in 2020. Will the RMD be automatically deferred until age 72?
A: No. Investors or their advisor need to direct us to modify or defer an automatic withdrawal plan. We can take the request verbally or in writing.
Q: How does the act impact you if you inherit an IRA?
A: Prior to the act, if you inherited an IRA, you could generally take required distribution over your expected lifetime. Many individuals who inherit an IRA will now be required to withdraw the entire account within ten years of the account owner’s death. The beneficiary can no longer extend distributions from the inherited IRA over their lifetime.
The new rule does not apply to a surviving spouse, a child (of the original account owner) who has not reached age of majority, disabled or chronically ill individuals, or any other person who is not more than 10 years younger than the deceased account owner. These types of beneficiaries can still take distributions over their lifetime (although upon reaching majority, minor children must take the account within ten years).
Q: Who do the new rules apply to?
A: These changes apply only to deaths after December 31, 2019. Existing inherited IRAs are not affected by the new rules.
Q: Are there impacts to making contributions to a traditional IRA?
A: Yes, beginning for the taxable year 2020 and after, IRA owners will be allowed to make contributions at any age as long as they have earned income. Previously, individuals could no longer make contributions starting with the year they reach 70½ and after.
Q: Can I make a penalty-free withdrawal from my IRA for expenses related to the birth or adoption of a child?
A: Yes, within one year after the birth or adoption of a child, IRA owners can take a withdrawal, up to $5,000 per child, which is not subject to the 10% early withdrawal penalty. An individual and spouse can each take a $5,000 withdrawal per child as long each has available IRA assets. Income taxes still apply to the withdrawal.
Q: How does the act impact 529 plans?
A: 529 plans may now be used to pay for certain student loan expenses up to a $10,000 lifetime maximum as well as certain apprenticeship program expenses. For distributions made after December 31, 2018, qualified education expenses includes expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in certain apprenticeship programs. The act makes these changes retroactive to distributions made after December 31, 2018. Of course, if withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.