Jan 06, 2020 -

Posted at 10:49 am News/Resources

On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement (SECURE) Act that will bring many important changes to the current retirement system.  In addition, a second bill, the Taxpayer Certainty and Disaster Relief Act of 2019, has significant implications for certain retirement savers.

 

Here is a summary of the new rules, provisions and tax extenders.  For questions, or more in-depth information, please contact a Sax Wealth Advisor here.

 

  • The age after which you must begin taking required minimum distributions (RMDs) from IRAs and retirement plans increased from 70 ½ to 72.

 

This change applies to those individuals who turn 70 ½ in 2020 or later.

 

  • A 10-year distribution cap replaces the lifetime “stretch” provision for non-spouse beneficiaries of inherited IRA and other retirement accounts

 

Before the SECURE Act, the RMD rules allowed a non-spouse beneficiary to gradually drain the substantial IRA they inherited over their IRS-defined life expectancy.  The new law now requires most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death.

 

  • For tax years beginning after 2019, the SECURE Act repeals the age limit of 70 ½ on contributions to traditional IRAs.

 

Before the SECURE Act, you could not make contributions to a traditional IRA for the year during which you reach the age of 70 ½ or any later year, assuming you have earned income.  Now you can.  Please note there was, and still is, no age restriction on Roth IRA contributions.

 

  • New exception to the 10% early withdrawal penalty for childbirth and adoption

 

The SECURE Act introduces a new exception to the 10% early distribution penalty and allows up to $5,000 to be distributed penalty-free from an IRA or from a plan as a “Qualified Birth or Adoption Distribution”.

 

  • Taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes

 

Individuals who have taxable stipends or other amounts paid to them to aid in the pursuit of a graduate or postdoctoral study can use those amounts as compensation for IRA/Roth IRA contribution purposes.

 

  • Non-deductible IRA contributions can be made with certain foster care payments

 

Individuals who received “Difficulty of Care” payments as a “Qualified Foster Care Payment”, and exclude those amounts from gross income, can use such amounts to make non-deductible IRA contributions.

 

  • Provision of ERISA Fiduciary Safe Harbor for ERISA fiduciaries selecting an annuity provider for retirement plans

 

Many ERISA fiduciaries avoid including lifetime income annuities as plan investment options out of fear those annuity carriers could run into financial problems in the future and result in a liability for the plan fiduciary.  To overcome this challenge, the SECURE Act has established new requirements for ERISA fiduciaries when conducting an annuity provider search.

 

  • Creation of a “distributable event” for annuities no longer allowed as plan investment options

 

The SECURE Act creates a “distributable event” that applies just to annuities when they are no longer allowed as an investment option within a plan.

 

  • Long-term, part-time employees who work at least 500 hours in at least three consecutive years will be eligible to participate in their employer’s 401(k) plan

 

The SECURE Act creates a “dual entitlement” system and keeps the old rule that allows employers to exclude employees from participating in a 401(k) if they have not worked at least 1,000 hours in a single plan year, but adds that employees must also be eligible to participate in the plan if they worked at least 500 hours in at least three consecutive years.

 

  • Employers may adopt employer-funded retirement plans up to the due date of the employer’s tax return

 

  • Significantly increased penalties for employers failing to file taxpayer and employee benefit plan returns

 

  • Qualified education expenses for 529 plan funds expanded for student loans and apprenticeships

 

The SECURE Act expands on the list of qualified education expenses which includes Apprenticeship Programs and introduces “Qualified Education Loan Repayments” as a qualified higher education expense.

 

  • Kiddie tax reverts applicable children’s income to be subject to child’s parents’ marginal tax rate

 

  • Discharge of certain qualified principal residence indebtedness is excluded from gross income

 

This tax benefit is reinstated retroactively to 2018 and made effective only through 2020.

 

  • Allowance of mortgage insurance premium deduction

 

This tax benefit is reinstated retroactively to 2018 and made effective only through 2020.

 

  • Deduction for qualified tuition and related expenses

 

This tax benefit is reinstated retroactively to 2018 and made effective only through 2020.

 

  • AGI “hurdle rate” for deducting qualified medical expenses to remain at 7.5%

 

The AGI “hurdle rate” that must be exceeded to deduct qualified medical expenses remains at 7.5% of AGI for 2019 and 2020 which was lowered from the previous rate of 10% of AGI in 2017.

 

  • Qualified Disaster Distribution from retirement accounts – up to $100,000

 

This relief is for individuals who have principal residences in a Federally declared disaster area, and who suffered an economic loss from that disaster.

 

  • Relief extended to plan participants in the form of enhanced plan loans

 

Increased the maximum allowable loan amount to $100,000 from $50,000 and delays loan repayments for up to a year.

 

  • Miscellaneous incentives for economic growth, energy production and green initiatives

 

 

These new changes will be very impactful to many taxpayers, particularly those with substantial tax favored-retirement savings.  Sax Wealth Advisors will continue to keep you updated as new updates emerge.  For any questions, or more in-depth information to the SECURE Act and the impact to retirement planning moving forward, please contact a Sax Wealth Advisor here.