In December 2019 Congress passed the Setting Every Community up for Retirement Enhancement Act of 2019 (The SECURE Act). On December 20, 2019 the President signed the SECURE Act into law. The SECURE Act includes several important changes effective January 1, 2020 for individuals.
The table below summarizes the key changes you should be aware of:
The table provides a good overview however there are some nuances and details you should be aware of. Let’s take a look at the six main changes implemented in the SECURE Act:
- Required minimum distribution age raised from 70½ to 72
Participants in retirement plans and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. Beginning in 2020, the RMD age has been changed to 72. This change only applies to individuals who did not turn 70 ½ in 2019. This means individuals who were required to receive a minimum required distribution in 2019 will continue to be required to receive a distribution in 2020.
- Partial elimination of stretch IRAs
Upon death of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and non-spousal) were generally allowed to “stretch out” distributions over the beneficiary’s life expectancy.
Beginning in 2020, The SECURE Act requires the entire inherited account be paid to the beneficiary of the account by the end of the 10th year following death of the account owner. Beneficiaries who inherited IRAs or retirement plan accounts prior to December 31, 2019 are not affected by the new rules and can continue to take distributions over their life expectancies.
There are several exceptions to the 10-year rule. Distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
- Penalty-free withdrawals
Owners of IRAs, 410(k)s or other retirement accounts may take a withdrawal prior to age 59 ½ for childbirth and adoption costs without incurring the 10% early withdrawal penalty normally imposed. However, distributions will be treated as taxable income and are limited to $5,000 per person. For a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
- Repeal of the maximum age for traditional IRA contributions
Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, if the individual has “earned income.” In general, “earned income” is compensation from wages or self-employment.
- Section 529 plans
Before 2019, tax free 529 plan distributions had to be used for qualified education expenses. The SECURE Act expands definition of qualified education expenses to include costs (including books and fees) of apprenticeship program. In addition, tax-free distributions (up to $10,000) can pay the principal or interest on a qualified student loan. The $10,000 is a per-person lifetime limit.
- Kiddie tax changes for gold star children and others
In 2017, Congress made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the 2017 changes, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child. Under the 2017 changes, the taxable income of a child attributable to net unearned income was taxed according to the brackets applicable to trusts and estates.
The SECURE Act repeals the kiddie tax measures that were added in 2017. Beginning in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the parents’ tax rates.
Although the SECURE Act was signed at the end of last year and did not receive a lot of attention, the provisions may have significant consequences which will necessitate appropriate planning to assure the best possible result. If you’re looking to speak to a financial professional, the team at Bloom Asset Management is always available.