Required Minimum Distribution (RMD) are suspended for 2020

Earlier this month the IRS issued a notice that suspends the requirement to take RMDs from retirement accounts this year. Also, if you had taken an RMD anytime after February 1, 2020, you can put the money back into the account to avoid taxation. Remember that RMDs are taxable at ordinary income rates in the year in which they are taken.  If you have the liquidity to do without the distribution this year and are in a high marginal tax bracket, it may make sense to not take a distribution or redeposit previous distributed funds.

Waiver of 10% penalty for early withdrawals from Qualified Retirement Accounts and IRAs

Typically, when you withdraw money from your 401K or IRA before age 59 1/2, you are subject to income taxes and a 10% penalty on the amount you withdraw. Under the CARES Act, the 10% penalty is waived on IRA distributions up to $100,000 and you have three years to pay income taxes on your distributions.  Alternatively, you can repay the distribution and it will be considered a rollover and not subject to income tax.  For 401Ks, if your company plan allows, you now can take a loan against your 401K of 100% up to $100,000 rather than 50% up to $50,000.  You also 3 years rather than two to repay the loan.

Required Minimum Distribution (RMD) age increases from 70 1/2 to 72

You can now defer paying any tax on your retirement accounts for another 18 months.  This also may present an extended opportunity to do a Roth conversion at a point where you may no longer be working and have modest income from social security so that you are in a low marginal tax bracket.  By paying tax on a distribution when you are in a low bracket, you may avoid tax (Roth distributions are not taxed) when you may be subject to a higher marginal tax rate as your RMDs kick in.

Age limit for IRA contributions has been removed

Previously you could only contribute to an IRA until age 70 ½.  Now if you have earned income you can contribute at age 71 and beyond enabling you to reduce taxable income and increase your retirement savings.

Inherited IRA distributions must be taken within 10 years

Prior to the Secure act you could stretch Inherited IRAs withdrawals over the life expectancy of the beneficiary.  Now if you inherit an IRA from someone who passed away after January 1, 2020, you may be required to distribute the full value of the account within 10 years.  There are exceptions for spouses, minor children and disabled or chronically ill beneficiaries.  Also, beneficiaries who are less than 10 years younger than the deceased IRA owner may stretch out RMDs.

Long-Term, Part-Time Employees are now eligible for 401K Plans

Previously, workers needed to work 1,000 hours during a year to contribute to a 401(k) plan.  Now employees who work 500 hours for three consecutive years and are at least 21 years old can contribute.

New Parents Can Take Penalty-Free Withdrawals

Before the Secure Act, if you took a withdrawal from your IRA or 401(k) before age 59 1/2, the amount would usually be subject to income tax and a 10% penalty unless funds were used for qualified medical expenses over 10% of AGI, to purchase health insurance if you are unemployed, for qualified higher education costs or up to $10,000 for a first-time home purchase. The SECURE Act adds an additional exception to this list; a $5,000 withdrawal after the birth or adoption of a child and you can repay the funds as a rollover contribution to avoid taxation on the distribution.