2020 Secure Act Overview

The appropriations bill signed into law before 2019 year-end included significant changes to tax and retirement regulations. Many are calling the law the most substantial retirement legislation in over a decade. The SECURE Act (Setting Every Community Up for Retirement Enhancement) and other tax extenders tucked inside the legislation contain both benefits and drawbacks.

Traditional IRA Contributions Age Limited Repealed
The Act eliminates a rule that prohibited contributions to a traditional IRA by taxpayers who are age 70.5 and older. Beginning with the 2020 tax-year, those who are still working may contribute to a traditional IRA, regardless of their age. There are currently no age-based restrictions on contributions to a Roth IRA and the Act did not change that provision. The ability to deduct an IRA contribution or to be eligible for a Roth contribution will still be dependent on overall income limitations.

IRA Required Minimum Distribution Begin Date Raised to 72
The Act increases the age for commencing required minimum distributions (RMDs) to 72 for all retirement accounts subject to RMDs. IRA owners who turned 70.5 in 2019 are subject to prior rules and still need to meet their RMD. IRA owners reaching age 70.5 in 2020 will not have to take their first RMD in 2020 and get a 1.5 year delay. A tax-free Qualified Charitable Distribution (QCD) from an IRA can still be done upon reaching age 70.5, even though no RMD will be required until 72.

Elimination of the Stretch IRA for Non-Spouse Beneficiaries
A new provision requires most non-spouse retirement account beneficiaries to liquidate the inherited account within 10 years of the original account owner’s death. This applies to both Traditional and Roth accounts. There will no longer be annual RMDs. This eliminates the ability to stretch the tax-deferred growth of inherited IRA funds over many years. Instead, the rule requires accounts to be fully withdrawn by the end of the tenth year following the year of death. Existing inherited IRA beneficiaries (for deaths occurring in 2019 or earlier) are not impacted and are still subject to annual required distributions over the lifetime of the beneficiary.

Distributions over life-expectancy will still be permitted for non-spouse beneficiaries who are minor children of the IRA owner, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the 10-year rule applies once the child reaches the age of majority.
Surviving spouse beneficiaries will continue to be able to stretch RMDs over life expectancy and combine a late spouse’s IRA with their own using a surviving spouse rollover.
Those who have named trusts as IRA beneficiaries should pay particular attention, as that decision may need revision. If a conduit trust was established for liability or spendthrift protection, those trust protections will be lost at the end of 10 years – most likely contrary to the intent of the original IRA owner. A discretionary trust may be able to accumulate assets to retain trust protection for a longer period of time, but at a potentially high income tax cost. Reevaluating beneficiary designations with estate and tax professionals is important as 2020 begins, especially for those with large retirement accounts or financially insecure beneficiaries.

Early Withdrawal Penalty Waived for Birth or Adoption
Retirement plan withdrawals of up to $5,000 will be permitted following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. The exception applies within one year from the date of birth or legal adoption. Married persons would be able to access $5,000 from each spouse for a potential total of $10,000. Important to note is that the distribution is still subject to income tax – unless returned using the 60-day rollover rule. The Act intends to allow qualified distributions to be repaid to a retirement account at any future time. However, future IRS regulations are necessary to explain if those repayments will result in a new tax deduction or if other restrictions will apply.

Revision of 401(k) Plans
A number of enhancements and administrative changes were enacted to 401(k) plans, mostly aimed at increasing participation and availability

Part time worker participation in 401(k) plans:

Currently, employees who have not worked at least 1,000 hours during the year are typically restricted from participating in their employer’s 401(k) plan. The SECURE Act opens eligibility to employees who have worked at least 500 hours per year for at least three consecutive years.

Lifetime income disclosure:

Plan administrators will be required to provide participants with estimates of what their 401(k) account balance could provide in monthly income as an annuity. This is meant to help savers better understand what their income might look like when they stop working. Implementation of this feature could be more than a year away due to the need for final rules on the assumptions used in the projections.

Easier to offer annuities in retirement plans:

Plan sponsors will receive some relief from the legal risks of offering annuities and lifetime income options to participants. The employer is required to conduct due diligence on selecting an insurance company, but is not required to select the lowest cost annuity product.

Increased Limit for Salary Deferral Auto-enrollment:

Automatic contribution arrangements allow an employee to gradually increase payroll deductions into a 401(k) plan each year the employee keeps contributing. The current cap on automatic contribution arrangements is 10% of an employee’s pay. The Act will increase that cap to 15% of an employee’s pay in an effort to boost retirement savings.

Help for small businesses to offer retirement plans:

The Act provides three incentives to help more small businesses offer retirement plans for employees. First, the maximum tax credit for retirement plan start-up costs will increase from $500 to $5,000. Second, a new tax credit for $500 is available for new plans that include automatic enrollment. Third, the Act will permit unrelated employers to join together in multiple-employer plans to lower administrative costs.

Credit card access to 401(k) loans eliminated:

Loans from a 401(k) via a credit card or debit card are now prohibited. This change is meant to reduce irresponsible borrowing from retirement funds.

Expanded Use of 529 Plans
The definition of qualified education expenses for tax-free withdrawals from 529 plans is expanded to include certain costs (fees, books, supplies and equipment) of apprenticeship programs registered with the Department of Labor. Information about these programs is available at https://www.apprenticeship.gov/.
In addition, certain student loan repayments are permitted, but only up to a lifetime maximum of $10,000 per beneficiary. The 529 plan beneficiary’s siblings and stepsiblings may also each receive $10,000 in student loan repayments. The portion of any student loan interest that is paid with the tax-free 529 plan withdrawal is not eligible for the student loan interest deduction.
The final legislation did not include provisions to allow 529 plan withdrawals to pay for homeschooling.

Lower Medical and Dental Expense Deduction Threshold Stays
The Tax Cuts and Jobs Act (TCJA) of 2017 included a provision that would have increased the adjusted gross income (AGI) threshold for itemized medical expense deductions from 7.5% of AGI to 10% of AGI starting with the 2019 tax year. The lower 7.5% threshold will now continue for both the 2019 and 2020 tax years. This should allow more taxpayers the ability to claim (or continue to claim) qualifying medical and dental expenses on Schedule A, at least temporarily.

Tuition and Fees Deduction Reinstated
This deduction for qualified postsecondary educational costs can be claimed by eligible taxpayers whether they itemize or take the standard deduction. The deduction of up to $4,000 can lower adjusted gross income. Income limits affect eligibility. Use of other education tax credits and/or 529 Plan withdrawals may also reduce or eliminate the ability to claim the deduction. The deduction originally expired for the 2018 tax year. The SECURE Act reinstates the deduction for 2018 retroactively as well as for the 2019 and 2020 tax years. The IRS will need to revise Form 8917 to address those who may be eligible to amend 2018 tax returns to claim the deduction.

Kiddie Tax Rules Revert Back
Following 2017 TCJA tax reform, a child’s unearned income (from investments) was taxed at trust and estate rates rather than at parents’ tax rates. For some low and middle income families, the trust and estate rates are less favorable than the parents’ own marginal tax rate. For some high income families, the trust and estate rates permitted more of a child’s long-term capital gains and qualified dividends to qualify for 0% or 15% rates. The SECURE Act repeals the change from the TCJA and reverts back to the old kiddie tax using the parents’ tax rates. The change is mandatory starting in 2020. For 2019, taxpayers have a choice. Forthcoming IRS procedures should provide guidance on how to elect the parental tax rate or trust tax rate for 2019 tax returns. Taxpayers can also go back to 2018 returns to evaluate any potential tax savings from filing an amended return under the parents’ marginal rate.

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