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John Bullis: New IRA rules on distributions

By John R. Bullis

The December 2019 “Setting Every Community Up for Retirement Enhancement” (SECURE) Act made some significant changes in the rules for IRA distributions.

Now (in 2020 and later) you can make contributions to your traditional (deductible) IRA. The old rule was if you were age 70 ½ or older, you could not do IRA contributions even if you had earned income from wages or self-employment.

That new rule does not allow you to do IRA contributions between Jan. 1, 2010 and April 15, 2020 that would count as a 2019 IRA contribution.

For beneficiaries other than spouse (tax code calls it non-spouse) the IRA they inherit must be paid out within 10 years after the death of the IRA owner (who set it up).

Before the SECURE Act, a lot of planning was done for beneficiaries who inherited (or will inherit) an IRA because they could take the Required Minimum Distributions over their own lifetime. A grandchild could inherit an IRA and take payments for many decades. No more. Now all of the inherited IRA by a non-spouse beneficiary must be taken in 10 years.

But there are exceptions to the rule. A child who has not reached the age of majority (usually 18 years old) can do the old “stretch” distributions, just like under the old rule. But when the child is the age of majority, then the rest of the distributions must be taken out in 10 years from that date.

And a disabled or chronically ill individual can elect to do the old “stretch” distributions over their lifetimes, just like a spouse or child.

There is another special rule for someone who is not more than 10 years younger than the original IRA owner. They also can do the “stretch” method that is for more than 10 years.

If you have your own IRA and you inherit another IRA, you still have to take the required minimum distributions (RMDs) from your own IRA and also take distributions for the inherited IRA.

There is a new $10,000 Section 529 (tuition plan) allowable distribution for payments of principal and interest on student loans. However, that is a lifetime limit for each beneficiary with excess distributions can be applied to the beneficiary’s sibling. Those distributions do count toward the sibling’s $10,000 lifetime limit.

Did you hear “The problem is not to learn to love humanity, but to learn to love those members of it who happen to be at hand.” Samuel R. Delany