By Michael Meiners & Mikayla Kinley
The following is part 3 of a 5-part series on the SECURE Act.
Hand in hand with raising the starting age for Required Minimum Distributions (RMDs) to age 72, the SECURE Act also removes the age restriction on making tax-deductible contributions to an IRA.
The prior rules restricted IRA contributions past age 70 ½, but as people are working longer, the governing bodies recognize that these workers should be allowed to continue to contribute to their IRAs. This was the last type of retirement account with an age restriction.
Starting in 2020, subject to existing income limitations, individuals of any age can make contributions to a traditional IRA if they are still working (i.e., have earned income). If a person continues to work past age 72 and needs to start taking the RMD, contributing to an IRA can help to reduce the now higher taxable income caused by the RMD income. The option still exists to contribute to a Roth IRA that offers tax-free growth.
One related feature of the SECURE Act is an anti-abuse rule relating to tax-deductible IRA contributions after age 70 ½ and Qualified Charitable Distributions (QCDs). This rule reduces the amount of QCDs that can be excluded from income by the cumulative amount of post-70 ½ IRA contributions. To illustrate this rule, here is an example from Kitces.com2:
Toby turns 70 ½ in 2020, but is still working part-time, earning $15,000 per year. In order to minimize his taxable income, Toby makes a $7,000 (including his over-age-50 catch-up) deductible contribution to his Traditional IRA. He continues to do the same for three more years (for a total of $28,000 of post-70 ½ Deductible Traditional IRA contributions), at which point he retires.
In 2027, Toby has an unusually large charitable streak and decides to make a $40,000 ‘QCD’, his first such distribution, to charity. Despite following all the QCD rules, Toby will ‘only’ be entitled to claim a QCD of $40,000 – $28,000 = $12,000. The remaining $28,000 given to charity can be claimed as an itemized deduction.
Contributing to an IRA at any age can be a great way to reduce your taxable income or increase your assets subject to tax-free growth. However, as you approach age 70 ½ and 72 (the ages when the QCD is allowed and the RMD begins, respectively), the first step should be calling our office or setting up a meeting to discuss your individual situation and determine the best course of action for you.