WHAT THE SECURE ACT MEANS TO YOU
The Setting Every Community Up for Retirement Enhancement (“Secure Act”), which was signed by President Trump on December 20, 2019, is the first major piece of retirement legislation in a decade. The Secure Act creates sweeping changes that immediately affect retirees and savers alike.
IRA CONTRIBUTIONS & DISTRIBUTIONS
Extended Contribution Age for those Working
Dating back to 1960’s concepts, prior law prohibited contributions to a traditional IRA account for those that had reached age 70½, even if still working. This created a dilemma as life expectancies increased and individuals worked later in life to fund longer retirements. The Secure Act now permits individuals to continue contributing to an IRA, so long as they continue working.
Required Minimum Distributions
Beginning Jan. 1, 2020, the age at which an individual will be required to begin making withdrawals from their traditional retirement account will increase from age 70 ½ to 72. This change will primarily benefit retirees who don’t need the funds and have not already reached age 70½. Those who are currently 70½ or older must continue withdrawing their required minimum distributions under current rules. However, those who reach age 70½ on or after Jan. 1, 2020, are subject to the new rules and will have an extra year and a half before they need to start making mandatory withdrawals.
The Secure Act effectively removes the Stretch IRA concept as an estate planning tool. A surviving spouse may continue to withdraw the inherited IRA account over their life expectancy, even if the funds are received through a conduit trust. However, with limited exceptions, other beneficiaries will be required to draw down the account over a ten (10) year period. The funds may be withdrawn incrementally over the ten (10) year period, or all in one (1) or more years (including everything in year ten (10).
The ten (10) year rule will be suspended for a disabled or chronically ill (certification required) individual until the disability or illness ceases or they pass away. If the beneficiary has not reached the age of majority, they will also be excluded from the ten (10) year withdrawal requirement and the funds can be distributed on a slower schedule. However, once they reach the age of majority the ten (10) year withdrawal requirement will apply.
This provision will not affect individuals who have already inherited an IRA and will only apply to those who inherit them starting on Jan. 1, 2020.This will preclude the account from continuing to grow on a tax-deferred basis into the future.
SECTION 529 PLANS
The Act expands the utilization of 529 education savings accounts to include the costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools. If the 529 plan funds are utilized to pay down student debt interest, the interest will not qualify for an “above-the-line” deduction.
RETIREMENT ACCOUNTS & PLANS
Penalty-Free Retirement Account Withdrawals
The Secure Act permits the withdrawal of up to $5,000 of retirement account funds to cover the expenses associated with a child birth or adoption. The withdrawal will avoid the customary ten (10%) percent early-withdrawal penalty so long as it is finalized within one (1) year of the child’s birth or adoption is finalized. The withdrawal will be subject to income tax unless recontributed into their retirement account.
Eligibility requires the adoptee to be younger than 18 years old or physically or mentally incapable of self-support. However, the penalty will still apply if you're adopting your spouse's child.
Disaster Tax Relief
This Act provision creates a waiver from the Section 72(t) additional income tax penalty for qualified disaster distributions from retirement plans up to $100,000. Individuals will have three (3) years to ratably spread the income tax payments on the distribution or repay the distribution back into the retirement plan.
Help for Small Businesses Offering Retirement Plans
The Secure Act contains three (3) provisions designed to assist more small businesses offer retirement plans for their employees. The provisions include (i) an increases in the tax credit, from $500 to $5,000, available for fifty (50%) percent of a small business's retirement plan start-up costs; (ii) a new three (3) year $500 tax credit for a small business's start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment and those that convert an existing retirement plan to an auto-enrollment plan; and (iii) commencing in 2021, an easier method for small businesses to join together to provide retirement plans for their employees and have a "pooled plan provider" administer it.
Section 131(c) of the Internal Revenue Code (“IRC”) defines difficulty of care payments as compensation to a foster care provider for the additional care required because the qualified foster individual has a physical, mental, or emotional handicap. Under the IRC this compensation is exempt from taxation. The Secure Act amends IRC sections 415(c) and 408(o) to allows these healthcare workers to contribute to a retirement plan or IRA by treating their exempt compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.
The Act reinstates for one (1) year the exclusions for qualified State or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations (volunteer firefighters and emergency medical responders) and increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services.
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