The Secure Act, which stands for the Setting Up Every Community Up for Retirement Enhancement (Security) Act, is seen as the most sweeping retirement legislation for more than a decade and effects retirees, employees and employers.
The SECURE Act is set to become effective January 1, 2020.
1. Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½
SECURE Act will push back the RMD age to 72
Starting January 1, 2020, your clients will need to start withdrawing money from their traditional IRA at age 72, a change from the current withdrawal requirement of age 70½.
If your clients turn 70½ in 2019, they will still need to take their RMD for 2019 no later than April 1, 2020. If clients are currently receiving RMDs (or should be) because they are over age 70½, they must continue taking these RMDs. Only those who will turn 70½ in 2020 or later may wait until age 72 to begin taking required distributions. However, when I read Section 114 of SECURE Act, it’s clear if you’re 70 1/2 this year, the “new” RMD rules don’t apply to you. You’re ‘stuck’ w/ RMDs for this year and next. Can’t win them all.
2. Clients Can Contribute to Their Traditional IRA After Age 70½
Section 107 of SECURE repeals maximum age for making a Traditional IRA contribution. Beginning in the 2020 tax year, the new law will allow your clients to contribute to their traditional IRA in the year they turn 70½ and beyond, provided they have earned income. They still may not make 2019 (prior year) traditional IRA contributions if they are over 70 ½.
3. Inherited Retirement Accounts
Upon death of the account owner, distributions to individual beneficiaries must be made within 10 years. 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 to the 10-year rule, but only until they reach the age of majority.
4. Adoption/Birth Expenses
The new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses, up to certain limits.
5. 529 Plan Updates
On the 529 savings plan front, the big change here is that up to $10,000 of 529 plan money can be used to pay off student debt. The $10k is, unfortunately, a lifetime amount, and NOT an annual limit. But, an additional $10k can be used to pay off student debt for each of the 529 plan [beneficiaries’] siblings.
In other words, there’s no double dipping, which means that if 529 plan money is used to pay down student debt interest, the interest doesn’t qualify for an “above-the-line” deduction. Lastly, apprenticeship programs are being added to the list of institutions able to take 529 funds, if they are registered with the Labor Department.
6. Retirement Plan Tax Credits
The old tax credit was a maximum of $500 per year for three years for setting up a retirement plan — or a total of $1,500 over three years.
An employer can now get up to $5,000 per year for three years for setting up a plan, and $500 per year for three years for including an automatic enrollment feature. That means the total tax credit, over three years, could be $15,500.
To get the maximum possible tax credit, an employer has to make 20 non-highly compensated employees eligible for the new retirement plan.
7. Employer Liability Protection for Annuities in Plans
The SECURE Act provides a safe harbor for employer liability protection for offering annuities in an employer plan. This is expected to open the door for more annuity products to be available as investment choices in employer plans.
8. No More Stretch IRA
Beginning for deaths after December 31, 2019, the stretch IRA will be replaced with a ten-year rule for the vast majority of beneficiaries. The rule will require accounts to be emptied by the end of the tenth year following the year of death. There will be no annual RMDs. Instead, the only RMD on an inherited IRA would be the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules would remain in place.
There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over life expectancy. These include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than ten years younger than the IRA owner.