The Consolidated Appropriations Act of 2020 includes a number of key IRA changes, all of which are effective in 2020. Most were part of the broader SECURE Act expanding coverage for retirement plan participation, facilitating lifetime savings and increasing access to retirement funds.
The SECURE Act took effect Jan. 1. The top 10 IRA provisions, set forth below, may impact any number of types of IRA (e.g., traditional, Roth, inherited, deemed, Simple and SEP).
For IRA providers, many of these provisions will require extensive system changes, updated policies and procedures, distribution forms, IRS reporting, and IRA governing documents.
For IRA owners, the minimum required distribution changes will spark reconsideration of various estate planning techniques and revised beneficiary designation elections, as current beneficiary designations (and the various trust vehicles) could well upset existing estate plans—which will no longer have the intended results.
IRS guidance—including impact on governing IRA documents, Form 1099-R/5498 reporting, new model IRA forms, possible transition relief for 2020, etc.—on these new provisions is needed and hopefully will be released over the coming months.
1. Post-Death Minimum Required Distributions Accelerated—Elimination of the Stretch IRA
Current Rules: Distributions must be paid out following the death of the IRA owner. The rules vary if the IRA owner dies before or after they reached age 70-1/2. In general, the rules permit distributions to be paid over the designated beneficiary’s life expectancy (so-called stretch IRAs). If there is no designated beneficiary, the IRA must generally be paid out over no more than 5 years.
New Rules: In general, distributions after death of the IRA owner must be made by the end of the tenth calendar year following the year of death. However, payments can be made over the beneficiary’s life expectancy, if the beneficiary is (1) a surviving spouse, (2) a disabled or chronically ill individual (or certain trusts for such persons), (3) a beneficiary no more than ten years younger than the IRA owner, or (4) a minor child of the IRA owner (generally, until the child reaches majority). (The existing rules appear to still apply for nondesignated beneficiaries.)
Effective Date: Deaths after Dec. 31, 2019. Special rules apply for inherited IRAs where the IRA owner died prior to Jan. 1, 2020. There is also a limited exception for existing commercial annuities, which may be held within defined contribution plans or IRAs. See chart for more details.
2. Eliminate Age Limit on IRA Contributions (and Deductions)
Current Rule: Regular contributions to a traditional IRA cannot be made once the IRA owner reaches age 70-1/2 (and no deductions were allowed).
New Rule: There is no longer an age limit on traditional IRA contributions, nor an age limit on deductions for such contributions. The Act also provides for rules for coordinating the impact on qualified charitable distributions (QCD) for post 70-1/2 contributions. Specifically, it provides that the exclusion from income for a QCD is reduced (but not below zero) by the excess of (1) aggregate amount of post age 70-1/2 deductions allowed, less (2) aggregate amount of such reductions counted in the prior years.
Effective Date: Contributions made for taxable years beginning after Dec. 31, 2019. This does not apply to contributions made on or after Jan. 1, 2020, that are designated for 2019.
3. Lifetime Minimum Required Distributions Delayed
Current Rule: Distribution from an IRA (other than a Roth IRA) must be made by April 1 of the calendar year following the year in which the IRA owner turns age 70-1/2.
New Rule: Age 70-1/2 is replaced with age 72.
Effective Date: IRA owners who turn age 70-1/2 after Dec. 31, 2019. This does not impact MRD payments required for 2019.
4. Expanded Small Employer Plan Tax Credits
Current Rule: Small employers that sponsor an IRA are eligible for a non-refundable tax credit of up to $500 per year (for three years) for qualified start-up costs.
New Rule: The existing credit is increased to up to $5,000 per year for three years. There is also a new credit (up to $500 per year for three years) for adding an EACA (eligible automatic contribution agreement) to a new or existing small employer plan. An eligible employer is one that meets the requirements to adopt a Simple IRA.
Effective Date: Effective for taxable years beginning after Dec. 31, 2019.
5. Additional Disaster Relief
Current Rule: There is various legislative relief for certain hurricanes and other nationally declared disasters.
New Rule: In general, for nationally declared disasters from Jan. 1, 2018, through 60 days following enactment (e.g. Feb. 18, 2020, other than California wildfires that already have relief), IRA owners can take up to $100,000 distribution without being subject to the 10% early withdrawal penalty (that can be taxed over 3 years), which distributions can be recontributed within three years.
Effective Date: For distributions attributable to nationally declared disasters from 2018 through Feb. 18, 2020.
6. Tax Relief for Withdrawals for Child Birth and Adoption Expenses
Current Rule: There is no special tax relief for IRA distributions for child birth or adoption expenses.
New Rule: IRA (and employer plan) withdrawals of up to $5,000 for child care and adoption expenses incurred within a year following birth or legal adoption are not subject to the 10% additional early withdrawal tax under Code section 72(t). These amounts may also be recontributed back to the plan or IRA subject to certain limitations.
Effective Date: Distributions after Dec. 31, 2019.
7. Direct Transfer of Portable Lifetime Income Products
Current Rule: There is no special provisions for lifetime income products being transferred from a qualified plan to an IRA.
New Rule: Permits a direct trustee-to-trustee transfer, or transfer of an annuity contract of lifetime income investments to another eligible retirement plan or IRA, where the associated investments are no longer authorized to be held as investment option under a qualified plan.
Effective Date: Plan years beginning after Dec. 31, 2019.
8. Increased IRA Withholding Notice Penalties
Current Rule: A penalty for failure to provide a withholding notice is $10 per failure (annual cap of $5,000).
New Rule: The penalty is increased to $100 per failure, with a maximum annual penalty of $50,000.
Effective Date: Withholding notices required to be provided after Dec. 31, 2019.
9. Expanded Definition of IRA Compensation to Include Foster Care Payments
Current Rule: There are no special IRA rules for foster care payments.
New Rule: Foster care payments that are excludible from income under Code section 131 (called “difficulty of care” payments) are counted as eligible IRA compensation for purposes of the nondeductible IRA contribution limit.
Effective Date: Contributions made after the date of enactment.
10. Expanded Definition of IRA Compensation to Include Graduate School Stipends and Fellowships
Current Rule: There are no special IRA rules for graduate school stipends and fellowships.
New Rule: Amounts includible in income and paid to aid individuals in their pursuit of graduate or postdoctoral study or research are counted as eligible compensation for IRA purposes.
Effective Date: Taxable years beginning after Dec. 31, 2019.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Elizabeth Dold is a principal for Groom Law Group. Her practice focuses on the Internal Revenue Code and related compensation matters, including employment taxes and other reporting and withholding requirements.