Year-End 2020 Tax News & Planning Strategies
SECURE Act Update
As we navigate the ever-changing landscape of tax law, we wanted to remind you of some of the provisions of the SECURE Act which became law on December 20, 2019. The acronym SECURE stands for the goal of the law reform – “Setting Every Community Up for Retirement Enhancement.” The law was enacted to make it easier for small business owners to set up retirement plans that are less expensive, easier to administer, and allow more employees to be eligible to participate. The SECURE Act is designed to make it easier for everyone to strengthen their retirement security.
Key Reforms for Individuals Include:
Required Minimum Distributions - The age triggering Required Minimum Distributions (“RMDs”) from an IRA has been raised from 70 ½ to 72. Now an individual can allow retirement savings to grow over a longer period of time if the cash is not needed sooner to cover living expenses.
Post 70 ½ IRA Contributions – Before the SECURE Act, individuals were unable to contribute to a Traditional IRA after age 70 ½; this limited the savings that could accumulate while working and saving later in life. The age limit for Traditional IRA contributions is now repealed.
The “Stretch” RMD – The SECURE Act eliminates “stretch” IRAs, so named because the distributions could be stretched over the life expectancy of the beneficiary who inherited the IRA. Now the beneficiary will be required to draw down the IRA within 10 years of the death of the original account holder. The 10-year rule does not apply to spouses, children under the age of majority (note that the 10-year rule will apply once the child reaches age of majority), a beneficiary who is less than 10 years younger than the account holder, or a beneficiary who is chronically ill or disabled.
Qualified Birth or Adoption Withdrawals – The Act now allows penalty-free distributions of up to $5,000 from retirement plans during the 1-year period after a child is born or an adoption is finalized. Formerly, a 10% penalty would apply. Married couples may each take a $5,000 distribution penalty-free, allowing for a total distribution allowance of $10,000 for the couple.
Expansion of Section 529 Plans – Education savings accounts are now expanded to include expenses related to registered trades or apprenticeship programs. In the past, only higher education institutions were considered qualified expenses. Additionally, a $10,000 lifetime maximum is allowed for distributions to repay qualified student loans.
Part Time Work Retirement Savings – After December 31, 2020, the Act expands 401K access to part-time employees. Now qualified plans are required to include long-term, part-time employees who have worked at least 500 hours per year in the past three consecutive years or employees who have worked one year with over 1,000 hours.
Kiddie Tax – The SECURE Act now eliminates the changes made to the “Kiddie Tax” in the 2017 Tax Cut and Jobs Act. Prior to the law change in December 2017, children with unearned income over $2,200 were taxed at the parents’ marginal rate. The TCJA changed that rate to the trust income tax rates, which in many cases could be much higher than the parents’ rate. Due to this unfavorable treatment, the SECURE Act eliminated the higher rate enacted in 2018 and restored the Kiddie Tax rate to the 2017 prior laws in which the Kiddie Tax will now be taxed again at the parents’ rates. These changes are in effect for 2020, however, the law also gives taxpayers the option to apply the change for 2019 and retro-actively to 2018 and amend the 2018 filing to claim a refund of the excess tax paid in 2018.
Many provisions of the SECURE Act became effective January 1, 2020. The list presented is not all inclusive, but rather highlights specific applications of the new law. If you have any questions regarding application of these new provisions or you would like to talk to us about how the SECURE Act applies to you, please call our office. We look forward to assisting you.