Getting SECURE: Part 4

Last week in this series about the SECURE Act, I talked about the 10-Year Rule, which replaced the lifetime “stretch” feature for inherited IRAs. I wanted to mention one more thing before we move on…

As I mentioned before, IRAs and 401(k)s are now under the 10-Year Rule. However, the following will not fall under this rule until 2022: Government plans like 403(b), 457, and the Federal Thrift Savings Plan (which coincidentally is what Congress uses for its retirement), along with plans that are part of a collective bargaining agreement.

Today’s SECURE lesson starts with contributions to your IRA. Before, as long as you had earned income, you could contribute to a Roth IRA at any age (subject to income limits), but you could only contribute to a Traditional IRA (the kind you get deductions for) if you were under 70-1/2. That restriction is now gone. Now, you can contribute to any IRA no matter what your age. Sorry, but this only affects tax year 2020 and beyond, 2019 contributions (which are allowed up to April 15 of this year) are under the old rules.

Here's another contribution goody: Taxable stipend payments and non-tuition fellowships can now count as earned income for the purposes of determining how much you can contribute to a Traditional or Roth IRA contribution. I don’t know of many college students who can afford to do without the money, however, if mom and dad are helping out this provides a nice way to jump start retirement savings.

Yet another new compensation-based feature deals with foster care providers. Certain increased payments related to the child’s physical, mental, or emotional handicap, which are already allowed to be excluded from gross income can now be used to allow non-deductible IRA contributions.

Early distributions from IRAs (prior to age 59-1/2) are penalized 10% and then taxed. There are exceptions to this, and under the SECURE Act another exception has been added: Adoption and Childbirth. You can now take up to $5000 penalty-free from an IRA or Qualified Plan as a “Qualified Birth or Adoption Distribution” (let’s call them QBADs).

Note that the QBAD must be taken within one year from the date of birth or finalization of adoption. You can’t take the money out prior to the event. However, that only affects the date of the distribution, the costs could have been incurred earlier. In fact, I haven’t seen anything in the rules that requires that you have any costs to use this benefit in the first place. Not that there is any way to have a child without a whole lotta expenses…

It also seems that each parent can use this feature if each has an IRA or Qualified Plan, which adds up to $10,000 in withdrawals available penalty free. There’s also a feature mentioned that allows repayment of a QBAD back into where it came from, but we’ll have to wait on clarification for how this works.

One sad note: QBADs only waive the penalty…you’ll still have to pay normal taxes on the distribution.

More on the SECURE Act next week.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.