(A version of this article by Col. Curt Sheldon, USAF (Ret), CFP®, EA, originally appeared in the February 2021 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)

As 2020 clicked by, changes to the Tax Code probably weren’t top of mind for you. That is understandable. But, between the SECURE Act and the CARES Act, there were significant changes to the Tax Code, and you’ll want to be aware of them when you file your return this year and as you do your tax planning going forward.

Below, you’ll find what you need to know about changes included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law in December 2019. Most changes went into effect on Jan. 1, 2020. The majority of changes have to do with retirement accounts. 

[RELATED: Your 2020 Taxes: Understanding the CARES Act]

Required Minimum Distributions (RMDs)

Under the old law, you were required to start taking distributions from your retirement accounts (with the exception of Roth IRAs) in the year you turned 70½. This is known as your Required Beginning Date (RBD). The SECURE Act changed the age requirement to 72. If you were younger than 70½ as of Dec. 31, 2019, your RBD is when you turn 72. If you were 70½ or older as of the end of the year, you must continue to take your RMDs.

As in the past, you must take your first RMD by April 1 of the year after you turn after you turn 70½, or 72 if you fall under the SECURE Act age change. RMDs for subsequent years must be made by Dec. 31. RMDs are required for 2021; they were not required for 2020.

[RELATED: More Financial Resources From MOAA]

Contributions to Traditional IRAs

Under the old law, you were not allowed to contribute to Traditional IRAs after turning 70½. You were allowed to contribute to all other types of retirement accounts, if you had earned income, with one notable exception for owner employees.

The SECURE Act brought Traditional IRAs in line with other retirement accounts. You can only contribute if you have earned income, and military retirement and Social Security are not considered earned income for IRA contributions.

Qualified Charitable Distributions (QCDs)

The Tax Cuts and Jobs Act, passed in 2017, established the ability to contribute to a charity directly from an IRA and exclude the amount contributed from income. This option was available for those who had turned 70½ and were subject to RMDs. It is especially valuable because many seniors don’t itemize deductions and thus don’t get a tax benefit from charitable contributions.

The SECURE Act did not change this rule. So even though you are not subject to RMDs, if you are older than 70½, you can make QCDs. Congress recognized that this opened up the opportunity for some “creative” tax planning, and they took action to shut that down.

If you make a contribution to an IRA after age 70½ and make a QCD, you must reduce the amount excluded from income by the post-70½ contributions. Let’s look at an example.

• You turned 70½ on Jan. 1, 2020.
• In February, you contributed $7,000 to a Traditional IRA.
• In December, you contributed $4,000 to your favorite charity via what you think is a QCD.
• In reality, you will need to include the entire $4,000 as income in 2020.
• You still have $3,000 of contributions remaining to offset future QCDs.
• In 2021, you make no contributions to your IRA but make another QCD of $4,000.
• You will include $3,000 of the QCD in your income (due to the $3,000 leftover from 2020) and $1,000 will be excluded.

You’ll need to track this yourself as your financial institution won’t track it for you.

Inherited Retirement Accounts

The SECURE Act also significantly changed the treatment of inherited IRAs. Under the old law, in most cases, RMDs for inherited retirement accounts were based on the age of the individual who inherited the IRA. The SECURE Act changed that and, in fact, eliminated RMDs in most cases.

Under the general rule, retirement accounts inherited in 2020 or later must be depleted 10 years from the year after the year of death. There is no requirement to take the distributions evenly. The only requirement is that the account is empty at the end of the 10 years. There are exceptions to the rule. The 10-year time limit does not apply to:

• Surviving spouse of the account owner.
• Child of the account owner who has not reached the age of majority (varies by state). The 10-year count starts at age of majority.
• A chronically ill individual as defined by the Tax Code.
• An individual who is not more than 10 years younger than the account owner.

There are a couple of other key details to understand in regard to this change:

• Once the 10-year clock starts, it doesn’t stop. In other words, if the account is inherited by one individual who doesn’t meet the exceptions above and that individual dies prior to 10 years, the new inherited account owner doesn’t get another 10 years. The clock doesn’t start over.
• The exceptions above can only be used once per account. If a spouse inherits the retirement accounts and passes away before emptying the account, and the person who inherits the account from the spouse is five years younger than the spouse, the new account owner is not allowed to stretch distributions over his or her life expectancy. The account must be empty in 10 years.

Col. Curt Sheldon, USAF (Ret), CFP®, EA, is president and lead planner at C.L. Sheldon & Company, LLC, a financial planning and tax firm. He is a Life Member of MOAA.