Do you need more incentive to save for retirement? You’ve got it! President Trump signed into law the SECURE (Setting Every Community Up for Retirement Enhancement) Act on December 21, 2019. The Act will have a substantial impact on the retirement funding strategy and results for many.
Most of the provisions affecting IRAs and retirement plans ease existing restrictions. Highlights include:
· The required beginning date for distributions increased to age 72 (up from age 70½) after 2019 for those born after June 30, 1949. Like before, deferring the first payment until the following April 1 can be elected.
· The age limit (currently 70½) for contributing to traditional IRAs is removed for contributions after 2019.
· The new law expands participation in 401(k) plans. The Act requires the inclusion of employees working 500 hours annually for at least 3 consecutive years when the third year is after 2023 and the employee is at least age 21.
· Penalty-free withdrawals of up to $5,000 (per spouse if married) for one year following your child’s birth or adoption (besides adopting your spouse’s child) are allowed after 2019.
· The tax credit on 50% of qualifying retirement plan start-up costs increased after 2019. Rather than capping at $500, the credit can be as much as $5,000.
· Graduate student and post-doctoral student stipends not considered wages will be eligible income for contributing to IRAs after 2019.
· Difficulty of care payments foster care providers receive through state programs will be eligible income for making nondeductible contributions to IRAs and defined contribution plans after 2019.
“Stretch IRAs” (named for the lengthy period beneficiaries can often use for calculating required minimum distributions) are further limited for most beneficiaries of account holders who die after December 31, 2019. Instead of getting to receive distributions over his or her life expectancy, most beneficiaries must receive the entire account within 10 years of the account holder’s passing. Exceptions to the 10 year limit include beneficiaries who are:
· The surviving spouse of the employee or IRA owner.
· “Chronically ill” for tax purposes.
· “Special needs” for tax purposes.
· Not more than 10 years younger than the owner.
· Minor children of the account owner with the 10-year limit normally applied when the age of majority is reached (age 18 in most states including Minnesota).
Access to 401(K) loans using credit cards or debit cards is no longer allowed after 2019. However, making it harder to borrow from a 401(K) plan is arguably a good thing because depleting your retirement account for non-retirement reasons should normally be avoided.
But Wait, There’s More!
While the core of the Act is based around retirement funds, a few non-retirement account provisions in the Act not to be overlooked include:
· The kiddie tax calculation method using trust tax rates has been repealed. The Act reinstates use of the parents’ marginal tax bracket. An election can be made to apply the old method for 2018 and 2019 returns and it must be used for 2020 returns or later.
· Section 529 plan funds can be distributed toward the student loans of the plan beneficiary or sibling of the beneficiary tax free and penalty free beginning in 2019. A lifetime limit of $10,000 from 529 plans can be used toward an individual’s student loans.
· Penalty-free and tax-free distributions from 529 plans are allowed to pay required fees, books, supplies and equipment for the beneficiary’s participation in a qualified apprenticeship program.
In addition to the SECURE Act, the recently enacted comprehensive legislation renewed extender provisions retroactively for 2018 through 2020. The extender provisions include:
· the deduction for qualified tuition and related expenses;
· the itemized deduction threshold for medical expenses is once again 7.5% for 2019 and 2020;
· the income exclusion for the relief from qualified principal residence indebtedness;
· the mortgage insurance premium deduction;
· the credit for homeowners of up to $500 lifetime for qualifying energy efficient residential improvements (such as windows, entry doors, furnace, water heater and insulation);
· the credit for builders of up to $2,000 for the construction of homes meeting specified heating and cooling energy efficiency standards;
· the employer credit for paid family leave; and
· the work opportunity tax credit for hiring workers from specified targeted groups.
There are new tax provisions in the Act not discussed in this article and many of the mentioned provisions have additional exceptions, rules and requirements that may apply to your situation. Contact your SDK tax expert with questions to learn more about how the new tax law may affect you.
SDK will be hosting a seminar on this topic, February 19. More information coming soon.