The SECURE Act: Eight Important Changes You Need to Know

Just before the holidays, Congress passed some meaningful tax regulations. One of the new laws passed on December 2019 is the Setting Every Community Up for Retirement Enhancement Act of 2019 (also known as the SECURE Act).

Through the SECURE Act, several changes were made that affect how you save your money for retirement, how you use your money in retirement, and how you can better use your Section 529 plans.

Below are eight of the changes that you’ll want to be aware of, no matter whether you are age 35 or 75:

  1. Small-Employer Automatic Contribution Tax Credit
  2. IRA Contributions for Graduate and Postdoctoral Students
  3. No Age Limit on Traditional IRA Contributions
  4. No 10% Penalty for Birth/Adoption Withdrawals
  5. RMDs Start at Age 72
  6. Open a Retirement Plan Later
  7. Expanded Tax-Free Section 529 Plan Distributions
  8. RMDs on Inherited Accounts

1. Small-Employer Automatic Contribution Tax Credit

If you have a 401(k) plan or SIMPLE (Savings Incentive Match Plan for Employees) plan for your employees, either you or it qualifies for a $500 tax credit each year for three years assuming the plan meets the following criteria:

  • Covers 100 or fewer employees
  • Implements an automatic contribution arrangement for employees

The tax credit begins with the first year of the aforementioned contribution and can apply to both newly created and existing retirement plans.

This change is effective for tax years beginning after December 31, 2019.

2. IRA Contributions for Graduate and Postdoctoral Students

Prior to the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students could not be used as a basis or IRA contributions. They were included in taxable income, but for IRA purposes were not treated as compensation.

Once the SECURE Act was put in place, the “compensation” obstacle was removed. The new law now states that “the term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

The change allows graduate and postdoctoral students to begin saving for retirement and enjoying tax-related retirement savings, assuming they have funds available.

However, if your child pays no income tax or pays tax at the 10% or 12% rate, you may want to consider contributing to a Roth IRA in place of a traditional IRA.

This change is effective for tax years beginning after December 31, 2019.

3. No Age Limit on Traditional IRA Contributions

Previously, you were unable to contribute to a traditional IRA if you were age 70½ or older.

Under the new law, you can make a traditional IRA contribution at any age, as with a Roth IRA.

This change applies to contributions made for tax years beginning after December 31, 2019.

4. No 10 Percent Penalty for Birth/Adoption Withdrawals

The 10% early withdrawal penalty on IRA or qualified retirement plan distributions is now eliminated if the distribution is a “qualified birth or adoption distribution” (maximum $5,000 per individual per birth or adoption). For this purpose, a qualified plan does not include a defined benefit plan.

It is helpful to know that a birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distributions to be made as early as January 1, 2020.

This change applies to distributions made after December 31, 2019.

5. RMDs Start at Age 72

Prior to the SECURE Act, the moment you turned 70½ was the year that you were generally required to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan. Now, you can wait until the tax year that you turn 72.

This change applies to RMDs after December 31, 2019, if you turn age 70½ after December 31, 2019.

6. Open a Retirement Plan Later

Previously, if you adopted a stock bonus, pension, profit-sharing, or annuity plan, you had to establish the plan before the end of the tax year to make contributions for that tax year.

Under the SECURE Act, if you establish the plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year.

For example, you can establish and fund an individual 401(k) for a Schedule C business as late as October 15, 2020 and have the 401(k) in place for 2020.

7. Expanded Tax-Free Section 529 Plan Distributions

If distributions from your child’s Section 529 college savings plan are investments into the plan (your basis) or used or qualified higher education expenses, the distributions are non-taxable.

Qualified higher-education expenses now include fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program. The apprenticeship program must be registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.

Qualified higher education expenses shall include amounts as principal or interest payments on any qualified education loan of the designated beneficiary or his or her siblings.

If you count on the student loan provision to make tax-free distributions from your Section 529 plan, there’s a $10,000 maximum per individual loan holder. The loan holder will reduce his/her student loan interest deduction by the distributions, but not below $0.

This change applies to distributions made after December 31, 2018, as you can use the new qualified expense categories to identify tax-free Section 529 distributions that are retroactive to 2019.

8. RMDs on Inherited Accounts

Previously when it came to inherited retirement accounts, you could “stretch out” the account and take deductions each year to eventually deplete the account over several years.

With the new plan, if you inherit a defined contribution plan or IRA, the full balances must be distributed by the end of the 10th calendar year following the year of death. There is no longer a requirement to take out a certain amount each year.

The previous rules will continue to apply to a designated beneficiary who is:

  • a surviving spouse,
  • a child who has not reached the age of majority,
  • disabled as defined in Code Section 72(m)(7),
  • a chronically ill individual as defined in Code Section 7702B(e)(2) with modification, or
  • not more than 10 years younger than the deceased.

This change applies to distributions for plan owners who die after December 31, 2019.

If you would like to discuss any of the new laws in more detail and how they may affect you, please don’t hesitate to contact our office at (732) 566-3660.

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