new tax provisions impacting retirement

The President signed into law, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), that may affect your retirement plans.  Many provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning.

Here is a look at some of the more important elements of the SECURE Act with an impact on individuals and businesses.  Please contact us if you would like to discuss these matters.

Repeal of the maximum age for traditional IRA contributions.  Starting in 2020, the new rules allow an individual of any age, previously to age 70½ , to contribute to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.  For individuals who attain age 70½ after 2019, the age at which individuals must take required minimum distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.  For deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), 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; (4) a disabled individual and (5) any other individual who is not over 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 registered apprenticeships and distributions to repay certain student loans.  Distributions from a 529 plan are excludable up to the designated beneficiary’s qualified higher education expenses.

For distributions made after Dec. 31, 2018, tax-free distributions from 529 plans can pay for fees, books, supplies, and equipment required for the designated beneficiary’s participation in certain registered apprenticeship programs.  In addition, tax-free distributions (up to $10,000) may pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes.  The kiddie tax is reverting to the law in affect before 2018. Starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed at the parent’s rate and not at the trust/estate rates.  And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.  Starting in 2020, plan distributions (up to $5,000 for each taxpayer) that are used to pay for expenses related to the birth or adoption of a child are not subject to the 10% early distribution penalty.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.  Starting in 2020, the new rules permit taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.  For contributions made to IRAs after Dec. 20, 2019, tax-exempt difficulty-of-care payments are treated as compensation to calculate the contribution limits to certain qualified plans and IRAs.

New small employer automatic plan enrollment credit and increased credit for small employer pension plan start-up costs.  Both of these provisions apply starting in 2020 to make it more affordable for small businesses to set up retirement plans.

Expand retirement savings by increasing the auto enrollment safe harbor cap.  The auto enrollment safe harbor cap is increased to 15% from 10%.

Allow long-term part-time employees to participate in 401(k) plans.  Starting in 2021, most employers maintaining retirement plans will have to allow employees that complete three consecutive years of service and work at least 500 hours of service per year to participate in making elective deferrals.  Those part time employees are excluded from testing under the nondiscrimination and coverage rules, and from applying the top-heavy rules.  The three-year requirement doesn’t consider years before 2020.

Plans adopted by filing due date for year may be treated as in effect as of close of year.  Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year.

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