Three Provisions for IRAs in the SECURE Act
Retirement Spotlight podcast - SECURE ACT (recorded Feb. 12, 2020)
Karyn McCormack: Welcome to Retirement Spotlight. This is Karyn McCormack.
(Background) Madame Speaker: The house will be in order.
Karyn McCormack: We're happy to have Brian Dobbis back with us for this podcast. He's Lord Abbett's director of retirement solutions.
(Background) Madame Speaker, pursuant to House Resolution 389, I call up HR-1994 and ask for it's immediate consideration in the house.
Madame Speaker: The clerk will report the title of the bill.
Union Calendar Number 42, HR-1994. A bill to amend the internal revenue code of 1986 to encourage retirement savings and for other purposes.
Karyn McCormack: The Secure Act was signed into law on December 20th, and includes nearly 30 provisions that affect how we save for retirement.
(Background) Madame Speaker: On this vote the yays are 417, the nays are 3. The bill is passed without objection. The motion to reconsider is laid on the table. (GAVEL)
Karyn McCormack: So let's kick things off by discussing the purpose of the act and its impact on IRAs. Brian, we're so glad to have you here today.
Brian Dobbis: Glad to be here, Karyn.
Karyn McCormack: The Setting Every Community Up for Retirement Enhancement Act.
Brian Dobbis: Well, Karyn, sweeping retirement legislation, or sweeping tax reform generally happens only every decade or so. And the final weeks of 2019 brought the second major piece of congressional action in the last 24 months, the first one being the Tax Cut and Jobs Act, and the SECURE Act. And the SECURE Act is the most significant piece of retirement legislation we've seen since 2006's Pension Protection Act.
Karyn McCormack: So first off, what was the purpose of the SECURE Act?
Brian Dobbis: The SECURE Act has something in it for everybody. From the increasing the age of required minimum distributions to 401(k) plans, offering lifetime income options, to the expansion of tax redistributions from 529 accounts.
The message here is, good advice is more important than ever. The SECURE Act brings quite a few changes that will impact retirees and retirement investors-- incentivize employers to offer retirement plans, promote additional retirement savings, enhance retirement financial security. In essence, Congress was looking to increase retirement savings by offering a number of provisions that I think are mostly positive. And I think our listeners will agree with that.
Karyn McCormack: That's great Brian. So let's focus on what the key provisions are that have impact IRAs. There are three ones you want to go through today, right?
Brian Dobbis: Yeah, there are three provisions. You know, as we said, there were 30, but I'd like to go through and cover the provisions that are getting the most press, and I personally am getting a lot of questions on. ]
And I think the first one I'd like to discuss, is the delayed or increased age of required minimum distribution. So I'm sure most of our listeners are aware, the required minimum distribution age for retirement investors is 70 and a half. And it's been 70 and a half for almost 60 years now, Karyn. So Congress changed more than half a century worth of RMD rules. They've changed the RMD age to 72. And I think most our listeners would agree, Karyn, that it's much easier to determine someone's 72nd birthday, versus their 70 and a half birthday.
Karyn McCormack: Okay, so let' go back over that. So if I turned 70 and a half last year in 2019, then I still have to take the RMD?
Brian Dobbis: Yes. I've been getting a lot of questions and there seems to be some confusion about that. So an individual who turned 70 and a half in 2019 had the option of taking their 2019 minimum distribution in 2019, or they could delay it until April 1st, 2020. If you have a client, or you're an individual that was subject to the RMD in 2019, you still do have to take it.
Karyn McCormack: So it still applies?
Brian Dobbis: Correct.
Karyn McCormack: Okay. And then what about the RMD rules for 401(k)s. You said that it applies to IRAs, it also applies to 401(k)s.
Brian Dobbis: It absolutely does. So if you turned 70 and a half-- in 2020, you may not have to take an RMD. Now Karyn, kind of interestingly, although the age is the same for IRAs and 401(k)s, who's subject to RMDs are a little bit different. Now this isn't part of the SECURE Act, Karyn. This has been law for quite some time.
At 70 and a half, and you own an IRA, you have to take an RMD case closed. Whereas in a 401(k) environment, if you are still employed by the employer sponsoring the plan, and you do not own more than 5% of the company, you may delay your RMD. If you own more than 5% of the company, Karyn, then you follow the IRA rules.
So I would urge our listeners to work with their financial advisors, see if you have the ability to delay your required minimum distribution. And then you can have a couple extra years potentially to let your assets and your 401K to continue to be tax deferred.
Karyn McCormack: So the second item was the traditional IRA contribution allowable at any age.
Brian Dobbis: Yeah, this is an interesting one, Karyn. The traditional IRA was the only IRA vehicle in which an individual could not make a contribution once they reach 70 and a half. For example, you could always fund the Roth IRA at any age, a SEP-IRA, a SIMPLE IRA at any age.
But for some reason Congress said, "Traditional IRAs, the year you reach 70 and a half, you no longer can fund the contributions because of minimum distributions." That's changed, folks. This is a game changer. Now if you're over 70 and a half, you still can fund a traditional IRA. However, Karyn, this rule, just like the prior one, first applies in 2020.
Meaning, if you're looking to make an IRA contribution for 2019, which you still can do through tax filing-- and you were 70 and a half last year, you cannot fund a 2019 contribution, only 2020. And Karyn, one thing for our listeners out there that's very important, you still do need earned income -- compensation, to be eligible. So ladies and gentlemen, if you're over age 70 and a half, you do need some source of compensation from a job, in order to fund an IRA.
Karyn McCormack: So Brian, it seems that this would be a good opportunity for the backdoor Roth strategy, is that correct?
Brian Dobbis: Yeah. In our prior podcasts, and some of the content that we've produced, Karyn, we've described a backdoor Roth. The repeal of the 70 and a half age cap of traditional IRAs opens the backdoor Roth strategy for those folks who are high income earners.
So in essence now, let's just say Karyn, you have a client who's 73 years old, has earned income of a few hundred thousand dollars. They are ineligible to fund the Roth directly because their income's too high. So now they can fund a traditional IRA on a non-deductible basis, and then convert it to a Roth.
I mean, it is a little bit more detailed than that, but do to the time constraints of today's podcast-- that's in essence the mechanics. But I would urge our listeners to work with their advisors…
Karyn McCormack: And/or find more information on LordAbbett.com. Now another item within the act is the charitable--
Brian Dobbis: Qualified charitable distributions, Karyn.
Karyn McCormack: Which are very popular with IRA owners. How does the new law impact QCDs?
Brian Dobbis: Although the SECURE Act increased the new required minimum distribution age to 72, the age in order to utilize the QCD remains at 70 and a half. So ladies and gentlemen, just keep in mind, you can now do a QCD at 70 and a half, although the RMD age is 72. So they're no longer on par.
Karyn McCormack: And then the other item we wanted to discuss today was a really good new benefit for parents-- having a new child or adoption. So let's talk about that one.
Brian Dobbis: The SECURE Act creates a new distribution option -- for the birth of a child, or the qualified adoption of a child under the age of 18. So in essence, you can take a distribution -- without being subject to the 10% early distribution penalty -- for the birth of a child, or a qualified adoption up to $5,000.
Now Karyn, it's important for our listeners to be aware, you would be subject to income tax, but no penalty. The way the law is being interpreted is, the distribution is eligible from a 401(k), a 403(b), or an IRA. And like all the other rules we discussed today, this particular provision went into effect January of 2020.
Like a lot of the rules in the SECURE Act, the devil is in the details, so to speak. And a couple of things I thought I would share with our listeners. First and foremost, to qualify for the distribution, the qualifying event must take place. Meaning, you cannot take a distribution prior to the baby being born, or the adoption being completed.
So you actually need for it to occur. But again ladies and gentlemen, if this is something that you're looking to utilize, I would urge you to speak with your advisor. And he or she will be able to guide you and help you with this new provision.
Karyn McCormack: And one more thing about that, Brian. You said that the distribution can be repaid, right, at some point? Do we know when?
Brian Dobbis: Unfortunately we don't. The act-- or the provision, allows a repayment of the distribution of up to $5,000. Unfortunately, the law, the provision, is silent on the repayment deadline. So this is one of those scenarios, we're going to have to wait for guidance from the IRS in terms of when the deadline is to repay the distribution.
Karyn McCormack: Brian, I look forward to our next podcast.
Brian Dobbis: Thank you, Karyn.
Karyn McCormack: For our listeners, on our website we have a series of articles about the SECURE Act, and what it means for clients, and your retirement planning. Please see our articles at LordAbbet.com/retirementperspectives.
Advisors, if you have additional questions, please contact your Lord Abbett representative at 888-522-2388.
Individual investors, please contact your financial advisor and/or accountant if you have any questions. And you can also follow Lord Abbett on LinkedIn to see our updated retirement articles. So thanks for listening.
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Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.
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A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
A qualified charitable distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 annually to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.