Tax Insights

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Big changes in IRAs – Expanding the definition of earned income

Recently, Congress passed and the President signed the SECURE Act “Setting Every Community Up for Retirement Enhancement”. This new legislation is the first major retirement reform since the Pension Protection Act in 2006.

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Many changes in the SECURE Act affect both 401k’s and IRA’s but one of the sometimes overlooked changes has to do with expanding the definition of earned income to include stipends and non-tuition fellowship payments received by graduate and postdoctoral students.

Historically, in order to contribute to an IRA, a person would need “earned income”. This would include items such as wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. Other forms of income such as earnings from investments, stipends, and other types of “non-earned income” were not considered compensation for IRA contribution purposes.

Starting in 2020, graduate and postdoctoral students can now treat taxable fellowships or grants as compensation for IRA purposes. This allows individuals under 50 to contribute up to $6,000 a year in 2020 which will allow them to get a jump start on retirement by saving earlier than they otherwise could have.

The SECURE Act has many new provisions so, as always, consult with your Henry and Horne tax adviser.

Ron Greenfield, CPA