Secure Act

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your current and future retirement savings planning.

Here is a look at some of the highlights of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with additional tax-savings opportunities. However, not all of these changes are favorable, and there may be steps you could take to minimize their impact. Please give us a call if you would like to discuss how this may impact your situation

Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

Key provisions affecting individuals:

Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the SECURE Act allows an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation. Compensation generally means earnings from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

The SECURE act changed age for beginning RMDs. For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions from the accounts over the beneficiary’s life expectancy. These are sometimes referred to as a “stretch IRA”.

Under the SECURE act for deaths of plan participants or IRA owners beginning in 2020, distributions to most non-spouse beneficiaries are generally required to be distributed within ten years following the plan participant’s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy.

Expansion of Section 529 education savings plans to cover distributions to repay certain student loans and registered apprenticeships

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions, up to $10,000, can be used to pay the principal and interest on a qualified education loan of the beneficiary, or the beneficiary’s sibling.

Kiddie tax changes for gold star children and others.

In 2017, Congress changed the so-called “kiddie tax” rules which tax the unearned income of certain children. Before these changes the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates were higher than the tax rates of the child.

After 2017 the taxable income of a child attributable to net unearned income is taxed according to generally higher tax brackets applicable to trusts and estates.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 the unearned income of children is taxed under the pre-2017 rules.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.