Top Year-End Tax Planning Tip #3: Retirement Planning in Light of the SECURE and CARES Acts
2020 presents unique opportunities for tax planning with regards to your retirement accounts. The SECURE Act and CARES Act, both enacted in 2020, made changes to certain rules regarding retirement plan contributions and retirement plan distributions. These changes may give you greater flexibility in retirement planning by allowing you to take advantage of provisions in the law that were not available in prior years. Taxpayers over age 70½ can defer earned income and generate current year tax savings by contributing to a Traditional IRA. Individuals that reach age 70½ in 2020 or later can delay their Required Minimum Distributions until they reach age 72. We have included information about the SECURE and CARES Acts upon their passage but a refresher before year-end might be beneficial for you.
Traditional IRA Contributions
The SECURE Act, enacted on January 1, 2020, has removed the age restriction for traditional IRA contributions. Individuals over the age of 70½ who are still working in 2020 can contribute to a traditional IRA. If you are over age 70½ and plan to make a Qualified Charitable Distribution (QCD) from your IRA, making a deductible IRA contribution could affect your ability to exclude future QCD’s from your income. Please contact us if you would want to request our assistance in planning that might be affected by theses provisions
Retirement Plan Distributions
Under the CARES Act, if the taxpayer meets certain coronavirus-related requirements, plan distributions during 2020 (up to a combined limit of $100,000 from all retirement plans) are not subject to the 10 percent additional tax on early distributions.
Qualifying distributions may be included in a taxpayer’s taxable income over a three-year period, one-third each year, beginning the year during which the distribution is received. Taxpayers may recontribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution. These repayments will be treated as a tax-free rollover and are not subject to that year’s cap on contributions. The IRS has a Q&A on these provisions at https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers.
Under the SECURE Act, the age for Required Minimum Distributions (RMD) was increased to 72. The new age limit does not apply to individuals who turned 70½ prior to the end of 2019.
One major change to retirement plan distributions under the SECURE Act is the 10-year distribution rule. This new rule requires most non-spousal beneficiaries of retirement plans, after January 1, 2020, to distribute the entire inherited account within 10 years of the account owner’s passing. This 10-year rule applies both to traditional IRAs and to Roth IRAs. Beneficiaries are no longer allowed to take minimum distributions over their own life expectancy due to this new rule. Exceptions to the 10-year distribution rule are:
- Surviving spouse,
- A minor child (10-year rule applies once the minor reaches the age of majority),
- A disabled individual,
- A chronically ill individual, or
- An individual who is not more than 10 years younger than the deceased participant or IRA owner.
We summarize here some of the highlights of the retirement plan provisions of the SECURE and CARES Acts. Please contact us if you have questions regarding any of these highlights or other questions you may have about retirement plan contributions and distributions.