Important Takeaways From The SECURE Act
The SECURE Act stands for Setting Every Community Up for Retirement Enhancement Act. It is a major tax reform that was signed by President Trump in December of 2019.
One of the goals of the SECURE Act is to broaden access to retirement savings programs. While this tax reform has a variety of benefits that will be helpful for many people, there are also some taxpayers who will be challenged by the changes.
Following are the most important takeaways from the SECURE Act:
Required Minimum Distribution (RMD) Age Increased
The age for RMD has been increased from 70½ years to 72 years of age. The opportunity to have retirement funds invested for two years longer is a huge benefit of the SECURE Act.
The extra two years also means more time to convert a traditional IRA to a Roth IRA, which does not have a RMD.
If a taxpayer turns 70½ in 2020 or later, the taxpayer will not have to take an RMD before age 72. The CARES Act allows taxpayers the option of not taking an RMD in 2020; taxpayers can instead delay taking an RMD until 2021.
In short, the SECURE Act allows for more time to grow retirement savings accounts before having to use the account.
Maximum Age for Traditional IRA Contributions Repealed
Beginning in the 2020 tax year, IRA contributions can now continue until after age 70½. This means that taxpayers have until April 15, 2021 to make an IRA contribution for 2020. If you are a taxpayer with an earned income, you can contribute to an IRA.
Roth IRAs do not have an age cap either, so contributions can be made regardless of age.
If you are over age 71 and still working, you can contribute up to $7,000 to an IRA.
Stretch IRA Eliminated
Beneficiaries of an inherited IRA or 401(k) have ten years after the owner’s death to distribute the account and pay any taxes owed. Previously, beneficiaries were able to stretch distributions and tax payments over their life expectancy, but this is no longer an option.
There is some flexibility. Distributions can be taken as needed. Beneficiaries can also let the account grow over the years and distribute by the end of the tenth year. However, non-spouse beneficiaries may miss out on the tax-deferred growth that used to be able to span decades and is now limited to ten years.
If you inherited an account before December 31, 2019, the ten-year rule does not apply to you! You can continue to take distributions throughout your lifetime.
There are other exceptions. The ten-year rule does not apply if the beneficiary is a surviving spouse, disabled, chronically ill, less than ten years younger than the account owner, or the minor child of the account owner.
Treatment of Taxable Non-Tuition Fellowship and Stipend Payments Changed
Individuals who receive tax stipends or other payments as they complete their graduate or postdoctoral study are now able to use this money to contribute to an IRA or Roth IRA. This means that students are able to start saving for retirement now, whereas they were not able to use this money for retirement savings prior to 2020.
New Birth and Adoptive Parents Can Take Penalty-Free Withdrawals
If an individual has a qualified birth or adoption, they can now take a penalty-free withdrawal to help with the cost of childbirth or adoption. Up to $5,000 can be withdrawn over a one-year period beginning when the account holder’s child is born or when the legal adoption is finalized.
Spouses are able to take the same $5,000 withdrawal, so married couples can withdraw a combined total of $10,000.
The repayment of the expenses is considered a rollover contribution, and not taxable income. Additionally, the taxpayer will still owe taxes on the gross withdrawal amount.
Previously, there was a 10% withdrawal penalty for retirement plan distributions taken before age 59½.
Tax Credits for Small Businesses That Offer 401(k)s
To encourage small businesses to offer employees a 401(k), there will be tax credits to help offset some of the costs.
Employees who invest in a 401(k) are now given more choices for how they want to invest their money.
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When there is a major tax reform, such as the SECURE Act, it is important to update tax planning strategies. We are happy to help, especially if you will be affected by any of the above changes. Please contact me to review all possible tax implications based on the SECURE Act.