Here we go again! Another sweeping legislation tax reform was passed recently called the Setting Every Community Up for Retirement Enhancement Act (also known as the “SECURE ACT”). This act is very important to all Americans including baby boomers who are soon near retirement and aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
The Act repealed the 70 ½ age limitation for contributing to a Traditional IRA
Individuals who still work (have earned compensation) are allowed to continue to contribute to their Traditional IRA regardless of age. (Individuals are allowed to contribute to ROTH IRAs with no restriction to age but still have income limitations). Effective for years beginning after December 31, 2019.
Delayed Required Minimum Distributions to 72 years of age
For participants in either company provided retirement plans (including 401(k) plans) or IRAs, the required beginning date for taking required minimum distributions (RMDs) has been raised to age 72, up from age 70 ½. The initial year distribution can still be deferred to the April 1st of the year following reaching the required beginning date. This change only applies to individuals who turn 70 ½ after December 31, 2019.
Reduction to limit on Qualified Charitable Distributions from IRA accounts
The $ 100,000 annual limit for the portion of an RMD that can be distributed directly to a charitable organization is reduced by any contributions made to an IRA subsequent to reaching age 70 ½.
Inherited IRAs – Non-Spouse Beneficiaries and a 10 year limit on Retirement death benefits
For employees and IRA account owners who die after December 31, 2019, non-spouse beneficiaries of inherited retirement accounts, subject to a few limited exceptions, are required to withdraw the account within 10 years (rather than stretching the value over the life of the beneficiaries). Provisions for spousal beneficiaries and spousal IRA rollovers do not change. Note that there are no annual minimums during the 10 year period.
Impact on IRA Trust Planning
IRA’s that named a trust as the beneficiary (e.g. Conduit or Accumulation trusts) must now distribute the IRA to the Trust (not the beneficiary) within 10 years.
Adoption of a Qualified Retirement Plan
Under prior law a qualified plan had to be established prior to the end of the tax year in order to claim a deduction for contributions to that plan. For tax years beginning after December 31, 2019 an employer can adopt and fund a qualified plan up to the extended due date of the tax return.
Increase in Penalties for late filed retirement plan returns
The penalty for failure to timely file a return for a retirement plan is increased tenfold – from $ 25 per day to $ 250 per day up to a maximum of $ 150,000. Penalties for failure to file certain ERISA required registration statements is also increased. Applicable to returns and statements required to be filed after December 31, 2019.
Additional Changes for Individuals
- Up to $10,000 from a college-savings 529 plan may be used to pay down student loans. However, some states, such as New York, may not allow this to be done tax-free.
- The Kiddie tax, which taxed children’s unearned income (dividends, interest, capital gains, etc.) at the same rate as trusts, has been changed. The new tax rates are those of the parents. This change is retroactive to January 1, 2018.
- For medical expenses the Adjusted Gross Income (AGI) floor went back down to 7.5%.
- You may take a penalty-free distribution of up to $5,000 from a Qualified Retirement Plan within one year of the birth or adoption of a child. However this distribution will be subject to income tax.
Changes for Private Foundations
Private Foundations now have a single tax rate of 1.39% on net investment income. The previous calculation to determine if a foundation had to pay a 1% or 2% excise tax has been eliminated.