The SECURE Act: IRA Contributions for Graduate and Postdoctoral Students


As has become usual practice, Congress passed some meaningful tax legislation as it recessed for the holidays.

In one of the new meaningful laws, enacted on December 20, 2019, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans.

Each week, I present one of the eight game changers of the SECURE Act. In week two, Congress changes the definition of stipends and fellowship payments to "compensation".

Before the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not treated as compensation for IRA purposes. Thus, they could not be used as a basis for IRA contributions.

The SECURE Act removed the “compensation” obstacle. The new law states: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

The change enables these students to begin saving for retirement and accumulating tax-favored retirement savings, if they have any funds available (remember, these are students).

This change applies to tax years beginning after December 31, 2019.

Tax tip. If your child pays no income tax or pays tax at the 10 percent or 12 percent rate, consider contributing to a Roth IRA instead of a traditional IRA.

Next Week: No Age Limit on Traditional IRA Contributions

#IRS #Retirement

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