The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by the President on December 20, 2019 and included many changes to the tax rules regarding IRAs and retirement plans. Some of these changes impacted contributions to IRAs, specifically the repeal of the maximum age for traditional IRA contributions and the inclusion of certain types of income as includible compensation for IRA purposes.
Prior to the SECURE Act, an individual who reached the age of 70 ½ by the end of the year was not permitted to make contributions to a traditional IRA. However, this restriction did not apply to contributions made to a Roth IRA. Effective for tax years beginning after December 31, 2019, the SECURE Act repeals this prohibition. For this purpose, Roth and IRA contribution rules are now the same.
Another change affecting contributions, is including non-tuition fellowship and stipend payments as compensation in order to calculate how much compensation was earned for IRA contribution purposes. Prior to the tax law change, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation and could not be used as the basis for IRA contributions.
Effective for tax years beginning after December 31, 2019, the new rules state that an amount includible in income and paid to them to aid the individual in the pursuit of graduate or postdoctoral study (such as fellowship, stipend, or similar amount) is treated as compensation for purposes of IRA contributions. Therefore, non-tuition fellowship and stipend income when included in taxable income now counts as compensation in order to make an IRA (both traditional and Roth) contribution. This allows those graduate and post-doctoral students to save more for their retirement than in the past.
The SECURE Act includes many provisions affecting retirement planning, including the changes addressed in this article. These contribution changes give individuals more ways to save for their retirement and should be considered as part of their retirement planning. Contact your Bonadio trusted advisor to find out more.