SECURE Act - How does it affect individual retirement accounts?
Key provisions of the SECURE Act include some unique to individual retirement accounts.
This is the sixth in a series of articles describing key provisions of the SECURE Act, this one with a focus on provisions unique to Individual Retirement Accounts. This legislation includes almost 30 changes that are intended to promote the adoption of employer-sponsored retirement plans, facilitate lifetime income options, and lessen administrative burdens. Employers must modify certain aspects of plan administration (and potentially financial planning decisions) to align with the SECURE Act’s more immediate changes.
1. No age limit on contributions to a traditional IRA
Prior to the SECURE Act, individuals could not make contributions to a traditional IRA after attaining age 70½, even if they still had eligible income. This prohibition applied to both deductible and non-deductible IRA contributions.
Related: SECURE Act - What are the lifetime income options?
The SECURE Act amends Code Section 219 to remove the 70½ age limit on contributions to a traditional IRA. Consequently, taxpayers who have reached age 70½ may continue to make contributions to a traditional IRA so long as they have eligible income.
Although this is optional, providers will likely amend their IRA documents to allow contributions beyond age 70½, and this goes into effect for contributions made in tax years beginning on or after January 1, 2020.
Investment providers will need to amend their IRA trust or custodial agreements or their annuity contracts to allow for contributions after age 70½. Taxpayers who make contributions after age 70½ must keep in mind that required minimum distributions (RMDs) must commence by April 1 after the year they attain age 72, unless they attained age 70½ before 2020 in which case RMDs must commence by April 1 after the year they attain age 70½. In addition, there are special rules under the SECURE Act for coordinating post-age 70½ contributions with “qualified charitable distributions, which are otherwise excludible from gross income under Section 408(d)(8)(A).
2. Certain fellowship and stipend payments treated as compensation for IRA purposes
In order to contribute to an IRA, a taxpayer must have “earned income.” Prior to the SECURE Act, “earned income” for purposes of Code Section 219 did not include certain taxable non-tuition fellowship payments or stipend payments that graduate students often receive.
For example, unless these students had other eligible income, they could not contribute to a traditional or Roth IRA.
The SECURE Act amends Code Section 219(f) to provide that “compensation” — for purposes of eligibility to contribute to an IRA — includes any amount that is paid to an individual to aid in the pursuit of a graduate or postdoctoral degree, so long as the amount is otherwise includible in the individual’s gross income for federal income tax purposes. Thus, for example, an individual receiving a $3,000 stipend but no other income may contribute up to $3,000 to an IRA.
This affects traditional or Roth IRAs and Individual Retirement Annuities, and is optional, although most providers will likely amend their IRA documents to provide that such payments are eligible “compensation.” This is effective for tax years beginning on or after January 1, 2020.
Investment providers may need to amend their IRA trust or custodial agreements or annuity contracts to provide that these sources of income are eligible “compensation“ for IRA purposes. Taxpayers in graduate programs, particularly those with no other sources of income, now have an opportunity to start saving for retirement at an earlier age.
