Last summer, I outlined the major changes possibly being advanced by a new law awaiting passage by Congress, the Setting Every Community Up for Retirement Enhancement (SECURE) Act. As you may recall, the act overwhelmingly passed the House in May of 2019 and was expected to speedily make its way through the Senate, but instead got stalled by a few senators seeking resolution on some of the provisions.
Just as it was starting to look like the Act may get stuck in legislative limbo indefinitely, it was quietly attached to the spending bill enacted by Congress just weeks before the end of 2019. The law was made final with the finishing touch of the President’s signature, which means it is time to plan for some changes to your retirement/tax strategies. Here is our top 10 list of changes to be aware of:
- “Stretch” IRA Provision Eliminated: Most non-spouse beneficiaries inheriting retirement accounts for decedents passing away beginning in 2020 will be required to deplete the account by the end of the 10th year following the year of inheritance.
- This provision changes the effectiveness of certain trusts as retirement plan beneficiaries. If you have a trust designated as a beneficiary, you should contact your estate planning attorney to discuss the implications further.
- RMD Age Raised to 72: This rule applies for individuals who turn 70 ½ after 12/31/19. Qualified Charitable Distributions are still allowed beginning at age 70 ½.
- This rule may provide greater opportunity for Roth conversions.
- Age Restriction Removed for Traditional IRA Contributions: Individuals may continue to make IRA contributions beyond RMD age as long as they have earned income.
- Qualified Education Expenses for 529 Plans Expanded: The SECURE Act expands the list of qualified education expenses to include apprenticeship programs (subject to specific requirements) and “Qualified Education Loan Repayments.” An individual may use a lifetime amount of up to $10,000 to pay the principal and/or interest of qualified education loans. Furthermore, an additional $10,000 may be used to repay qualified education loans for each of a 529 plan beneficiary’s siblings. This provision is applied retroactively, effective at the beginning of 2019. Since 529 plans are state-sponsored, some states may not conform to federal regulations for state income tax breaks.
- TCJA-Version Kiddie-Tax Rules Repealed: Rules for taxation of unearned income of certain children have reverted back to pre-Tax Cuts and Jobs Act regulations. Any income subject to the Kiddie Tax is no longer taxed at trust tax rates, but is instead taxable at the child’s parent’s marginal tax rate. This is effective for 2020 with the option to elect to apply the provision to 2018 and/or 2019.
- Taxable Non-Tuition Fellowship and Stipend Payments Considered Compensation for IRA Contributions: Individuals with taxable stipends and/or non-tuition fellowship payments as part of graduate or postdoctoral studies are allowed to use these payments to meet the “earned income” requirement for traditional and Roth IRA contributions.
- Penalty-Free Withdrawal Options Increased for IRAs and 401(k) Plans: Individuals are eligible to withdraw up to $5,000 as a “Qualified Birth or Adoption Distribution” within one year without incurring a 10% penalty for pre-59 ½ distributions. Individuals may repay the plan at any future time. The distributions will still be subject to tax, however.
- 401(k) Participation Expanded for Part-Time Employees: Part-time employees who work at least 500 hours in 3 consecutive 12-month periods will be allowed to participate in their employer 401(k) plan beginning in 2021. Employers will not be required to contribute.
- Multiple Employer Plan (MEP) Rules Loosened: Unrelated employers seeking to pool retirement plans for economies of scale will no longer be required to have a significant common relationship. This rule will be effective beginning in 2021.
- Fiduciary Safe Harbor Provided for Employers Offering Annuities in Retirement Plans: This new ERISA Section provides liability protection for employers who wish to include lifetime income products within company retirement plans as long as they satisfy two requirements.
- The employer must review the financial capability of an insurer and determine that, at the time of selection, the insurer is capable of satisfying obligations. In order to satisfy this requirement, all the employer is required to obtain is certain written representation from the insurer itself.
- The employer must determine that the overall cost in relation to the benefits and features is reasonable. This does not require the fiduciary to select the lowest cost option.
For further review of some of the major provisions, refer back to my previous article: https://www.apcm.net/blog/financial-planning/the-secure-act-pared-down-how-this-bill-may-impact-your-retirement/. The SECURE Act is a major piece of legislation with significant changes as outlined above, making retirement and tax planning a more critical piece of your financial picture than ever.
Meghan Carson, CPA
Associate Financial Advisor