January 7, 2020

The New SECURE Act

By Eduard Zolotarev, Supervisor, Tax & Business Services

The New SECURE Act Tax Advisory Services

On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). Below are the major changes to tax law rendered by the SECURE ACT that are most likely to affect you.

Impact on Individual Retirement Accounts (IRA)

Inheritance of IRAs – Effective for IRA owners dying after 12/31/2019

  1. Under the old rules, IRAs inherited by NON-SPOUSAL beneficiaries, could be “stretched” over the life expectancy of the inheriting beneficiary.
  2. The new rule is that distributions by the beneficiaries have to be made within 10 years after the original owner’s death. There are no specific rules regarding the timing of distribution, other than that the entire account balance must be distributed within ten years, or partial distributions in any other way they see fit.

    The 10-year rule has exceptions for the following beneficiaries:
    1. Surviving spouse
    2. Disabled
    3. Chronically ill
    4. Individuals who are NOT at least 10 years younger than the decedent
    5. Minor children (can use life expectancy until they reach age of majority)

 

Required Minimum Distributions (RMD) begin at age 72 vs 70.5

  1. This only applies to individuals who turn 70.5 in 2020 or later.
  2. The distribution must be taken by April 1 in the year AFTER the taxpayer turns 72.
  3. Qualified Charitable Distributions (QCD) can still be made from traditional IRAs prior to age 72, up to $100,000 per year per taxpayer.
    1. Taxpayer must be Age 70.5 to make QCDs.

 

Contributions to IRAs no longer limited by age – effective 1/1/2020

  1. Starting in 2020, taxpayers of ANY AGE will be allowed to contribute $6,000 (plus a $1,000 catch-up contribution for individuals aged 50 and above ) to a traditional IRA.
  2. Future QCD’s reduced by the amount contributed after age 70.5

 

Qualified Birth or Adoption Distributions – effective 1/1/2020

  1. $5,000 penalty-free distribution after EACH birth or adoption of a child.
    1. There are no requirements that withdrawn funds be spent on the children; only that the distribution must be made within a one-year period after the qualifying event (birth/adoption).
  2. This amount can be recontributed to the IRA afterwards.

 

Taxable Non-Tuition Fellowship and Stipend Payments Treated as Compensation for IRA Purposes – effective 1/1/2020

  1. Non-tuition payments are considered earned income for IRA contribution limits.
    1. Graduate and postdoctoral students can contribute entire tuition compensation (up to IRA limits) to IRA.

 

Other SECURE Act Provisions

Small Business Tax Credit for Retirement Plans

  1. Startup of retirement plan
    1. Effective 1/1/2020 – 3 year credit.
    2. Setting up a retirement plan for a small business
      1. Fewer than 100 employees who receive at least $5,000 in annual compensation
      2. Credit limited to greater of:
        1. Less than 100 employees that receive at least $5,000 in annual compensation

 

Auto-enrollment Retirement Plan Credit

  1. Auto-enrollment option for retirement savings Plans provided by small employers
    1. Employers adopt an auto-enrollment feature for retirement plan.
  2. Credit amount – $500 total per year for first three years

 

More Retirement Plans can be Adopted after Year-End – effective 1/1/2020

  1. Beginning in 2020, employers may adopt plans that are entirely employer-funded, such as pension plans, stock bonus plans, profit sharing plans, and qualified annuity plans, up to the due date (including extensions) of the employer’s income tax return.

 

Retirement Plan Employee Eligibility – effective 1/1/2021(2024)

  1. Employees must be eligible to participate in a retirement plan if they worked at least 500 hours annually in at least three consecutive years or 1,000 hours in the current year, and meet the age requirement (age 21).
  2. Since the 500-hour rule does not start until the 2021, the first employee would become eligible in 2024.

 

529 Plan Distributions – effective 1/1/2019

Qualified Education Loan Repayments
  1. $10,000 lifetime tax-free distribution limit per person to repay student loan debt.
    1. Interest repaid with this money cannot be deducted as student loan interest.
    2. An additional $10,000 may be distributed as a qualified education loan repayment to satisfy outstanding student debt for each of a 529 plan beneficiary’s siblings.

 

Kiddie Tax – effective 1/1/2020

  1. Revert back to pre-Tax Cuts and Jobs Act (TCJA) rules. Must use the parents’ rate to file the kiddie tax returns starting 1/1/2020
  2. Taxpayers can elect to apply the new rules back to 2018 and 2019.
  3. There may be refund opportunities.

 

Tax Extender Bill

Medical Expenses – effective 1/1/2019
  1. Medical expenses itemized deduction hurdle rate adjusted to 7.5% (from 10%) for 2019 and 2020