ICYMI: Changes to IRAs in 2020
Your Hometown Bank Shares What You Need to Know
The economic changes due to COVID-19 happened quickly and affected almost every area of life, including Individual Retirement Accounts (IRAs). The Sturgis Bank team gathered the latest news that may affect current IRA account holders and people examining retirement savings options.
The Basics About Individual Retirement Accounts
Unlike other types of savings plans like 401Ks offered by some employers, most IRAs are long term savings and investment accounts that you manage.
Two popular types of IRAs available through Michigan Community banks like Sturgis are Traditional and Roth. Both offer you tax advantages and allow contributions up to $6,000 annually if you're younger than 50. You can contribute an additional $1,000 if you're 50 years old or older. You can begin taking money out of your IRA when you reach age 59 1/2. If you withdraw funds earlier, you'll face a 10% tax penalty.
While the fundamentals of IRAs are similar, the plans differ in income eligibility limits and the timing of tax deductions.
- Traditional IRAs:
- If you have access to an employer 401K plan, you can't make IRA contributions with an annual income of more than $75,000 as an individual or $124,000 as a couple.
- Let you take a tax deduction on both federal and state tax returns for the year when you make contributions. When you withdraw funds in retirement, you'll pay taxes on the distribution.
- Lower your taxable income, potentially helping you qualify for other tax incentives like student loan interest deductions or the child tax credit.
- Roth IRAs:
- Income eligibility is higher for Roth IRAs, $139,000 annual incomes for individuals, and $206,000 for couples.
- Don't give you a tax deduction when you contribute to your IRA, but as a result, provide you with tax-free withdrawals. You've paid your 'tax bill' upfront and won't owe anything in retirement.
What's Changing with IRAs in 2020
Last year, Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). The new legislation includes the following provisions for IRAs:
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- The age when you must begin withdrawing money from your IRA increases to 72 from the prior 70 1/2 target.
- If you're still earning income, you can continue making contributions to your IRA after age 70 1/2.
- You can withdraw up to $5,000 without penalty to help with the costs of having or adopting a child for the first year.
In March 2020, Congress passed the CARES Act (Coronavirus Aid, Relief, and Economic Security). While the Act focused primarily on providing economic aid to businesses during the initial aftermath of COVID-19, it also included changes to retirement plans like IRAs. The law states:
- You're not required to take an IRA distribution in 2020, which could reduce your taxes if you have a Traditional IRA. Minimum distribution requirements will be back in 2021.
- You won't face the 10% penalty for early withdrawal of funds this year, giving you access to your money if you're unemployed or furloughed. If you decide to take out some of your IRA savings, you have up to 3 years to pay any taxes on the distribution.
Talk with Sturgis Bank about Planning for Your Retirement
It's never too early or too late to begin saving for retirement. Our Oakleaf Financial Services team can talk with you about IRAs and other wealth management solutions.
If you're ready to learn more about creating your nest egg for the future, connect with our team online or visit one of our branch offices.