SECURE Act – Setting Every Community Up for Retirement Enhancement

The SECURE Act was signed last month and is one of the most significant changes to the retirement legislation. The changes are most likely to help many households boost their retirement savings. The SECURE Act commonly known as – Setting Every Community Up for Retirement Enhancement – offers small businesses additional tax incentives for starting a retirement plan.

Many of the changes became effective January 1, 2020 and there are major areas that will impact many taxpayers retirement plans. Some of the major changes include:

IRA Changes

Contribution to Traditional IRA after Age 70 1/2

Beginning in 2020, individuals can contribute to traditional IRA in the year they turn 70 1/2 and beyond provided they have earned income. However, individuals may not make a traditional IRA contribution if they are already over the age of 70 1/2.

Required Minimal Distributions (RMD) will start at age 72, instead of age 70 1/2

This means that starting on January 1, 2020 individuals can begin withdrawing money at age 72 from their traditional IRA and employer tax deferred accounts (401(k), 403(b), and 457). If you turn 70 1/2 in 2019 or earlier you don’t get the benefit of the new delay. You must continue taking minimum distributions if you are already over 70 1/2. Only individuals who are born on or after July 1, 1949 may wait until age 72. Taking out the current required minimal distributions or RMD‘s is mandatory each year, since there is a 50% penalty for not withdrawing the mandatory amounts in the required year. The penalty is in addition to the ordinary income tax you pay on money you withdraw from the retirement accounts. If you forget to withdraw the RMD, the penalty can be waived by filing Form 5329 with an explanation of the error to the Internal Revenue Service (IRS). If the IRS deems the error to be reasonable, the penalty will be waived.

Adverse Impact on IRA Qualified Charitable Contributions

After reaching age 70 1/2 you can make qualified charitable contributions of up to $100,000 per year  directly from your IRA. These contributions are called qualified charitable distributions or QCD. Effective for QCDs made in a year beginning after 2019, $100,000 QCD limit for that year is reduced, but not below zero by the aggregate amount of deductions allowed for prior tax year due to the Secure Act change.

Inherited Retirement Accounts

Upon death, an owner’s distributions to non-spouse individual beneficiaries must be made within 10 years. Currently, a non-spouse IRA beneficiary can stretch required minimum distributions from an inherited account over their own lifetime which normally allows funds to grow tax-free. This benefit has been eliminated. The new law applies to inherited 401 (k) accounts or other defined contribution plans. However, there are exceptions for spouses, disabled individuals and individuals not more than 10 years younger than the account owner. Minor children who are beneficiaries of IRA accounts also have a special exception until they reach the age of majority. The bill closed the loop around stretch IRA and applies to beneficiaries of someone who dies after the end of 2019.

Adoption and Birth Expenses

The new law allows penalty free withdrawal’s for retirement plans for birth or adoption expenses up to $5000 limit and will apply to each parent including those who have adopted children. A couple can draw a combined amount up to $10,000 from the retirement savings as long as they both have separate accounts in their own names.

529 Plans are Expanded

The education savings has been expanded to include some costs associated with homeschooling, private elementary and secondary school up to $10,000 of a 529 plan to pay down student loan debt.

Part-time Employees are Eligible

If you work part time for three years you may be eligible to participate in your employer‘s 401(k) plan. The new law requires companies that offer 401(k) plans to allow part-time employees who have worked at least 500 hours a year for at least three consecutive years to set aside money into the plan.  The employer isn’t required to make matching contributions until the employee reaches normal eligibility requirements. In the past, employees working part time could legally be excluded from the contributing to a 401(k) or similar plans if the employee worked less than 1000 hours a year.

New Benefits for Small Businesses

Small businesses can join together to combine multiple employer plans which increases the financial incentives for small businesses to offer retirement plans. Overall these changes are positive because they make retirement planning more assessable for individuals.

Please contact a member at Wilke & Associates to assist you with retirement planning based on The SECURE Act.

Maria D. Stromple, CPA, MST