The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and Tax Extender and Disaster Relief Act were both passed at the 11th hour and signed into law on December 20, 2019.
These make several tax changes affecting folks in the second half of life. Let’s dive right in on a few key provisions.
New Age for Starting Required Minimum Distributions (RMDs) from Your IRA
If you’re not yet taking Required Minimum Distributions (RMDs) from your IRA, you’ll have an extra couple years to do so.
Starting in 2020, the age to begin taking your RMDs is shifting from 70½ to 72.
In addition to the two years reprieve, it’ll be good to finally be rid of that ridiculously confusing “1/2,” though it’s still in place for when you can begin taking distributions without penalty (age 59½) and for Qualified Charitable Distributions (still at 70½).
If you’re already taking your RMDs (or you turn age 70½ in 2019), you’re grandfathered to continue with current rules.
No More Prohibition on Contributing to Traditional IRA After 70½
Current law does not allow you to contribute to your Traditional IRA once you begin taking your RMDs at age 70½. That’s changing.
Starting in 2020, as long as you or your spouse have compensation--generally wages or self-employment income--you (or your spouse) can contribute to your Traditional IRA at any age.
For those who do so, it admittedly may be a bit of a revolving door with contributions going in and minimum distributions coming out. But the flexibility is still a positive move.
And for the charitably inclined, there will be new anti-abuse rules to coordinate any continuing IRA contributions with any Qualified Charitable Distributions (QCDs) coming out.
Elimination of Lifetime “Stretch” for Required Minimum Distributions on Inherited IRAs
The “stretch” retirement account distribution strategy is going away and it's one of the biggest of these recent legislative changes.
Up to this point, if you died with an IRA your designated beneficiaries were eligible to stretch the Required Minimum Distributions (RMDs) over their own life expectancy using IRS tables. Any such arrangements that are already in place will be grandfathered with beneficiaries continuing to take their RMDs according to current rules.
But for IRA owners who die in 2020 and beyond, the lifetime stretch RMD option for their designated beneficiaries will be replaced with a “10-year rule.”
Essentially, there will no longer be RMDs within the 10 years but simply a requirement that the IRA be empty by the end of the 10th year after death. How much and when the distributions are taken will be completely up to the beneficiary. (I smell an opportunity for helpful tax planning!) The IRS only cares that the IRA is empty when 10 years are up.
As with all things tax, there are exceptions for “Eligible Designated Beneficiaries." These include:
- Spouse beneficiaries
- Disabled beneficiaries
- Chronically ill beneficiaries
- Individuals who are not more than 10 years younger than the decedent
- Certain minor children (of the original retirement account owner), until they reach the age of majority.
Medical Expense Deduction Threshold Goes Back to 7.5% of Income
For folks who itemize their deductions, the medical expense deduction threshold has been bouncing between 7.5% and 10%.
For 2019, it had gone up to 10%. But once again, the "new-old" deduction threshold has been reduced to 7.5% retroactive to January 1, 2019 and extending through 2020. A lower hurdle for you to clear.
529 Education Savings Plan Can Be Used for Apprenticeships and Paying Student Loans
You know that 529 "college" savings plan you set up for your kids or grandkids? It used to be it was only for qualified college and trade school expenses. Then in 2017, it was expanded to allow up to $10,000 annually toward qualified K-12 expenses.
Now the strings are being loosened a bit further. Retroactive to January 1, 2019, eligible 529 plan expenses will include (1) certain qualified apprenticeship expenses and (2) qualified education loan repayments up to a $10,000 lifetime maximum.
These are just a few key tax changes that affect second-halfers. For more information on the broader changes, check out: Congress Passes Bill Chock-Full Of Extenders, Healthcare Tax Repeal & Retirement Plan Tweaks
As with all tax matters, the potential impact on you depends on the facts and circumstances of your situation. Feel free to reach out if you'd like to discuss any of these.