As retirees and near-retirees dig into the biggest changes to the retirement system in more than a decade, questions abound around the Secure Act’s new rules regarding IRA contributions and required minimum distributions.
First, a quick recap: The Secure Act was signed into law at the end of last year, packaging together a number of small changes intended to improve Americans’ retirement security. Some measures improve access to work-based retirement plans while others are aimed at helping people save more.
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One measure eliminated the age cap for contributions to individual retirement accounts, a nod to the trend toward people working longer. Another measure raised the age for when people need to start taking required minimum withdrawals from tax-deferred accounts, like 401(K) plans, to 72 from 70½—a change that is effective only for those who hit 70½ this year or later.
Barron’s tapped financial advisors to help answer some of the more frequent questions that have come in from readers.
Q: Is the elimination of the age cap for IRA contributions limited to those who turned 70½ this year or later?
A: There isn’t an age limit anymore for anyone. Anyone who is still working who stopped contributing at 70½ can continue to keep contributing—even if that means they are just beginning to contribute to an IRA.
Q: With required minimum distributions and IRA contributions now allowed to be made simultaneously, what should investors know to maximize their savings and minimize their tax hit?
A: An IRA contribution can be made only if the saver has compensation, generally from earned income. And that taxable income has to be at least as much as the IRA contribution, says Glen Smith, a certified financial planner in Flower Mound, Texas. Those who aren’t working typically can’t recycle required minimum withdrawals as new IRA contributions.
If a saver does have compensation, Smith says it may instead make sense to contribute to a Roth IRA, which doesn’t have required minimum withdrawals and can be pulled out tax-free.
Q: Before the Secure Act, one could make charitable donations from an IRA starting at 70½. Now that the Secure Act delays required minimum distributions until 72, does it also delay the ability to make charitable contributions and take the related tax savings?
A: The Secure Act made no change to the age at which qualified charitable deductions may be made. That’s still 70½.
Q: For someone who wants to transfer their IRA/401(k) upon death to a qualified 501(c) nonprofit, does the Secure Act create a tax event in this situation?
Q: Does the new legislation change the thinking around qualified charitable distributions?
A: Yes, but first a bit of background: QCDs are a way for IRA owners and beneficiaries who are 70½ or older to donate up to $100,000 annually from their IRA directly to charity. That QCD goes toward fulfilling a person’s RMD and can be excluded from taxable income.
Since the Secure Act pushes RMDs back to age 72, any QCDs before then won’t offset any RMD amount and there is no credit for future years’ RMDs, says Jeffrey Levine, a financial planner and a contributor Nerd’s Eye View Blog.
What’s more, Levine says, if someone wants to use their IRA to make QCDs, it “greatly diminishes” the value of IRA contributions after 70½. Here’s why: The QCD amount is excluded from income to begin with. Plus, if someone contributes to a traditional IRA and takes the tax deduction, that contribution amount is excluded from the QCD that can be used for the special RMD offset treatment.
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