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The SECURE Act and the CARES Act

calculator-385506_1280.jpgThe Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed at the end of 2019, and became effective January 1, 2020. It was designed to strengthen retirement security. 

Due to the economic upheaval created by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed a few months later in late March 2020. Its primary purpose was to provide financial relief for both businesses and individuals.

Whether you see your personal planning needs as complex or fairly straightforward, some of the provisions of these Acts can have an impact on your personal planning in 2020.

How does the SECURE Act impact retirement account distributions?

Under the SECURE Act, required minimum distributions (RMDs) from qualified accounts must begin at age 72 instead of age 70½. In addition, contributions can now be made to a traditional IRA after age 70½ if you have income. However, contributions after age 70½ count against qualified charitable distribution amounts. (Note: the CARES Act suspended RMDs in 2020. More details below.)

What are IRA “stretch” provisions, and how have they changed under the SECURE Act?

Before the SECURE Act, “stretch” provisions made it possible for non-spouse beneficiaries of IRAs (and other qualified plans) to take RMDs over the beneficiary’s lifetime, stretching out the amount of time over which the retirement account funds would be received and taxed. For example, before the SECURE Act, a 40-year-old daughter who was the beneficiary of a parent’s IRA could receive the funds over her lifetime if she wished. The new law limits the stretch period to 10 years for most non-spouse beneficiaries. In our example, if the IRA funds were passed to the daughter at age 40, she would need to receive all the funds by age 50.

Did the CARES Act also have an impact on retirement account distributions?

Yes, it did. The CARES Act waives the RMD rules for certain defined contribution plans and IRAs, but for 2020 only. The result is that, whatever your age, you are not subject to RMD rules this year. You can still take distributions, of course, and they will be subject to income taxation, but you are not required to take a distribution.

What about qualified charitable distributions from an IRA?

You can still make them if you are age 70½ or over, subject to annual limits that have been in place for several years now. You will not be taxed on a qualified charitable distribution made to UMass Chan Medical School, subject to the limits mentioned. For some donors, this continues to be an effective way to give in 2020 and beyond.

Are there other ways that the CARES Act affects charitable giving?

For those who do not itemize, the CARES Act allows a $300 above-the-line deduction for cash gifts to charitable organizations in 2020. Also, in 2020 only, the CARES Act increases the limitation on deductions for cash gifts to public charities (but not to donor-advised funds). The individual limitation is raised to 100 percent of AGI, which means some donors could find that 2020 is a good year to make a large cash gift.