By Sarah Brenner, JD
The SECURE Act eliminated the age restriction on contributions to traditional IRAs. The rule outlawing contributions for those 70 ½ or older is no more. This is good news for older IRA owners who are still working or have a spouse who is. Now, traditional IRAs have joined Roth IRAs as available options for eligible savers of all ages. This new rule may seem straightforward, but we have been getting some questions about who is eligible and when it is effective.
Making Contributions and Taking RMDs
One area of confusion for some IRA owners is how the new rule eliminating the age limit for traditional IRA contributions works with another new rule in the SECURE Act, the rule raising the RMD age to 72. IRA owners who reached age 70 ½ in 2019 cannot take advantage of the new ruling delaying RMDs until age 72. They must still take an RMD for 2019 by April 1, 2020 and another RMD for 2020 by December 31, 2020. However, even though they lose out on the new delayed RMD rule, they can still take advantage of the new rule eliminating the age restriction for traditional IRAs.
This will create a situation similar to what has always been the case for SEP and SIMPLE IRAs. Contributions may be coming in for those who are eligible as RMDs are being paid out.
Example 1: Grace is a pre-school teacher. She reached age 70 ½ in 2019. She must take an RMD for 2019 by April 1, 2020 and an RMD for 2020 by December 31, 2020. She can also make a 2020 traditional IRA contribution.
SECURE Act Does Not Apply to 2019 Prior Year Contributions
Another area of confusion is when the rule eliminating the age 70 ½ limit for traditional IRA contributions is effective. This rule is effective for contributions for tax years 2020 and later. It is NOT effective for 2019 contributions. This is true even for prior year 2019 contributions made in 2020. The old pre-SECURE rules apply to 2019 contributions, and those rules do not allow contributions for years in which an individual is age 70 ½ or older.
Example 2: Gabe, 77, works part time at a local hardware store. He would like to contribute to a traditional IRA. Gabe may make a contribution for 2020 to his traditional IRA. However, he cannot make a prior year contribution in 2020 for 2019.