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The SECURE Act Signed into Law

SECURE Act signed into law

President Trump signed the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, into law December 20.  Included in the federal government’s recent spending bill, the Secure Act is designed to help Americans increase and preserve their retirement savings.

The provisions in the SECURE Act bring a number of changes, with most going into effect January 1, 2020. Below are some of the key provisions.

Required Minimum Distribution Age Increases

The age in which retirement savers have to start withdrawing money from traditional IRAs and other qualified retirement accounts is now 72. This can make a big difference for those still working or who don’t need the income yet from their IRA accounts. The money can continue to grow tax free a little longer.

Keep in mind, if you turned 70 ½ in 2019, you still have to take your first RMD by April 1, 2020.  If you turn 70 ½ in 2020, you now have until April 1 of the year following turning age 72 to take your first RMD.  For example, if you turn 72 in February of 2022, you have until April 1, 2023 to take your first RMD.

No Age Limit for Traditional IRA Contributions

The bill eliminates the maximum age for traditional IRA contributions which were previously capped at age 70 ½. You still must have earned income to contribute to an IRA, or contribute as a spouse of someone with earned income.

Eliminates Stretch IRAs

The stretch IRA has been eliminated for non-spouse beneficiaries. Stretch IRAs were a popular estate planning tactic which allowed younger non-spouse beneficiaries to take RMDs based on their life expectancy.

Individuals that inherit an IRA or 401(k) account will have 10 years to distribute the funds.  There are no RMDs, but all funds must be distributed by the end of the 10th calendar year after the death of the account owner.

There are exceptions to the 10 year rule which apply to spouses, disabled individuals, individuals less than 10 years younger than account owner, and minor children who are beneficiaries of the IRA (but only until they reach the age of the majority).

Qualified Retirement Plan Adoption

Businesses may adopt a qualified retirement plan up to the tax filing due date (including extensions), and elect to have the plan treated as being adopted as of the last day of the taxable year.   The provision provides flexibility to employers considering adopting a new plan, and for employees to receive contributions.

Small Business Auto Enrollment Tax Credit

A tax credit of up to $500 per year is available to small employers (less than 100 employees) that include automatic enrollment into 401(k) and SIMPLE IRA plans. The credit is available for 3 years for start-up plans, and existing plans that amend their plan to automatic enrollment.  

Increases the Tax Credit for Small Business Plan Startup Costs

To offset the startup costs of new pension plans, there is an increased tax credit available for 3 consecutive years.  The credit is equal to either the greater of $500, or the lesser of $250 for each eligible employee that is not highly compensated, up to $5,000.

Part-Time Employees Will be Eligible to Participate

Employers are required to allow employees working less than 1000 hours per year to participate in the company’s 401(k) plan.  To be eligible to participate, employees must complete either one year of service working at least 1000 hours, or complete 3 years of consecutive service working at least 500 hours.

Employees that qualify under the 3 year service rule may be excluded from nondiscrimination testing and top heave rules.  Employers are not required to match contributions or make profit sharing contributions. The provision goes into effect January 1, 2021, and prior service does not count.

Adoption and Birth Expenses

The birth or adoption of a new child brings many additional costs to parents. The new law allows for penalty-free withdrawals from retirement plans for birth or adoption expenses up to $5,000 during the 1-year period beginning on the date on which a child is born or legally adopted.

529 Plans

Distributions from 529 plans for qualified higher education expenses now includes registered apprenticeship programs, including fees, books and supplies for the program. 

Furthermore, distributions may also be made for qualified education loan repayments. The repayment amount includes principal and interest up to $10,000 for beneficiaries and their siblings.  The deduction for student loan interest will be reduced by the distribution. 

The effective date for 529 plans applies to distributions made after December 31, 2018.

Resources:

Setting Every Community Up for Retirement Enhancement Act of 2019

Further Consolidated Appropriations Act, 2020

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