New IRA Rules for 2020

Just before Christmas, Congress passed legislation which was promptly signed into law by the President, making significant rule changes pertaining to IRAs and other qualified plans. Following are just a few quick highlights for your general reference:

Starting for tax year 2020, there is no longer an age limit on who may contribute to an IRA. For 2019 and prior, you had to be under age 70-1/2. As you may know, you have until April 15th of one year to make an IRA contribution for the prior tax year. This change does NOT allow those 70-1/2 or older by the end of 2019, to make a 2019 IRA contribution by April 15th of 2020; the contribution must be for tax year 2020.

If you had not yet reached the age of 70-1/2 by the end of 2019, you may now wait until age 72 before being required to take annual minimum distributions (RMDs). If you were already 70-1/2 or older by the end of 2019, you are not affected by this change, and must continue taking your RMDs in 2020 and 2021, even if you aren’t 72 by the end of those years… in short, there was no transitional relief for those already affected by the 2019 rules.

If you inherit an IRA from someone who is not your spouse and passes away in 2020 or later, in general you will now have to withdraw the entire IRA within 10 years. There is no change with regard to spouses or disabled beneficiaries, and in limited other cases. And again, there is no change if the date of death was in 2019 or prior; previous distribution options remain intact.

Parents may now take up to $5,000 out of their IRAs within one year of the birth or adoption of a child. The withdrawal will be subject to income tax as usual, but the early withdrawal penalty will be waived. In addition, the withdrawal may be paid back into the account within one year and treated as a rollover, that is, without reducing the maximum contribution allowed for that year. We caution against availing yourself of this new provision however. In general, most people are already not saving enough for retirement, and withdrawing funds can put you even further behind for your future.

Again, these are just highlights, and there may be further transitional guidance issued by IRS in the coming months (or sadly too late for some people, years). You should talk with us or another tax advisor before making any decisions based on these changes, to be certain the rules will apply to you as we’ve described above, but even more importantly, to decide what is really in your best interests both tax-wise and economically.