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While most Americans were putting the finishing touches on their 2019 holiday preparations, the federal government put a bow on the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The bill is not as far-reaching as the Tax Cuts and Jobs Act of 2017, but it contains meaningful changes that were intended to improve retirement for American taxpayers.

The Changes

  • Required Minimum Distributions (RMD) from IRAs pushed to age 72
  • Age limitation on IRA contributions lifted
  • Stretch IRA eliminated
  • Larger tax credits offered to small employers that establish retirement plans, PLUS employers offered additional tax credits for implementing 401(k) plans with auto-enrollment
  • New opportunities for annuities in 401(k) and other retirement plans created
  • Tax-free withdrawals from 529 plans allowed for repayment of student loans up to $10,000
  • Penalty-free withdrawals from IRAs allowed for up to $5,000 of qualified birth or adoption expenses

Required Minimum Distributions from IRAs pushed to age 72.

Since the early-1960s, taxpayers have been required to begin taking taxable distributions from their Individual Retirement Accounts during the year in which they turned age 70 ½, despite consistently rising life expectancies and lengthier careers. The new rule applies to taxpayers turning age 70 ½ after December 31, 2019.

Planning Opportunity: There is a wrinkle in the new rule, which creates an opportunity for charitably-inclined taxpayers. Taxpayers may continue to make Qualifying Charitable Contributions (QCDs) beginning at age 70 ½, despite not being required to take their RMDs until age 72.

Age limitation on IRA contributions lifted.

Taxpayers have long been prohibited from making contributions to Traditional IRAs after age 70 ½, due largely to the fact that when the rules were enacted very few people worked into their 70s.  Now, many people work well beyond age 70. It makes sense they should be allowed to contribute to their IRAs while they continue to work.  The government acknowledged this by eliminating the age limitation on contributions to Traditional IRAs.

Stretch IRA eliminated.

The beneficiaries of inherited IRAs have for many years been able to elect to spread distributions of taxable income from inherited IRAs over their individual life expectancies.  Through enactment of the SECURE Act, Uncle Sam has said, “Stretch no more.”  Unless they meet one of a few exceptions, beneficiaries inheriting IRAs on or after January 1, 2020, must withdraw all assets within 10 years of the death of the IRA owner.  Certain beneficiaries are exempt from this rule, including surviving spouses, minor children, disabled or chronically-ill beneficiaries and beneficiaries that are less than ten years younger than the owner of the IRA.

Planning Opportunity: If estate planning documents contain language intended to limit access to inherited assets over time, it is critical to evaluate the documents to determine if they will have their intended effect absent the ability for many beneficiaries to “stretch” distributions from inherited IRAs.

Larger tax credits offered to small employers that establish retirement plans, PLUS employers offered additional tax credits for implementing 401(k) plans with auto-enrollment.

The impetus behind creation and enactment of the SECURE Act was addressing what many believe is a growing retirement crisis in the United States.  To that end, the Act incentivizes employers to provide their employees more and better opportunities to save for their retirements.  Small employers (businesses with 100 or fewer employees) that establish 401(k), 403(b), SEP IRA or SIMPLE IRA plans will be entitled to tax credits. Additionally, employers that incorporate auto-enrollment features on their 401(k) plans will receive tax credits. Subject to certain conditions, the new rules will allow employers to deduct as much 15% of an employee’s wages for contribution to the employee’s account in the company’s 401(k) plan.

Additional changes to retirement plan rules include eligibility of qualified part-time employees to participate in 401(k) plans, the ability of certain small businesses to share the costs of certain defined benefit plans with other small businesses and the opportunity for employers to adopt employer-funded retirement plans by the due date of the entity’s tax return, rather than year-end.

New opportunities for annuities in 401(k) and other retirement plans created.

Rules enacted under the SECURE Act are likely to result in the expansion of annuity offerings in retirement plans.  The changes, which have been met with some skepticism, include a Fiduciary Safe Harbor provision, which protects plan advisors that perform appropriate due diligence on the companies whose products they include in their plan.  Another key rule relates to a participant’s ability to move an annuity out of a retirement plan under certain conditions (this trait is formally known as portability).

Planning Opportunity: With the initial tax deadline for most businesses less than two months away, it is a perfect time for tax professionals to talk with their small business clients about their retirement plans. The changes offer business owners opportunities to optimize their tax situations and to do well by their employees.

Tax-free withdrawals from 529 plans allowed for repayment of student loans up to $10,000.

Families with meaningful balances in 529 college savings plans may elect to take out student loans for a variety of reasons (e.g., to help a student know what it feels like to have skin in the game). The SECURE Act allows people to repay up to $10,000 of a student’s education debt with tax-free distributions from 529 plans. In addition, a family may use up to $10,000 per child to repay student debt of each of the student’s siblings from the student’s 529 plan.

Penalty-free withdrawals from IRAs allowed for up to $5,000 of qualified birth or adoption expenses.

The process of growing a family has never been more complicated or expensive. Whether funding the navigation of the heavily-regulated adoption process or trying to figure out how to pay for child delivery, costs for bringing a child into a family are significant. Thanks to the SECURE Act, families may now take penalty-free withdrawals of up to $5,000 per parent to pay certain birth and adoption expenses. People will still need to pay tax on such withdrawals, but they will avoid the 10% penalty that typically applies to withdrawals from retirement accounts prior to age 59 ½.

To learn more about how the SECURE Act might impact you or your business, please contact us to speak with one of our advisors.

Sources:
https://www.marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21
https://www.nytimes.com/2020/01/10/your-money/529-college-savings-accounts.html
https://www.wsj.com/articles/inheriting-iras-just-got-complicated-thanks-to-new-retirement-overhaul-11576904481
https://www.wsj.com/articles/senate-spending-bill-includes-significant-changes-to-u-s-retirement-system-11576780736
https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/
https://www.forbes.com/sites/martinshenkman/2019/12/25/secure-act-new-ira-rules-change-your-estate-plan/#7b1973b4710f