What IRA Holders Should Know About the SECURE Act

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President Trump signed The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) into law on December 20^th of 2019. The law enacts notable changes upon IRAs and Individual 401(k) plans that retirement plan holders need to be aware of. 

Here’s a breakdown of some of the more significant changes (effective January 1, 2020):

Age Limitations of Traditional IRA Contributions Repealed

Starting tax year 2020, there will be no age limits to prevent account holders from making contributions to their Traditional IRAs. Individuals who continue to work during retirement can save for future retirement years in their Traditional IRAs.

Age of Required Mandatory Distributions Increased to 72

The age at which individuals need to start taking required minimum distributions has been extended to the year the IRA holder turns 72. However, individuals who turned age 70 ½ in 2019, will still need to take their first RMD by April 1, 2020.

Modifications to Required Minimum Distribution Rules

Certain beneficiaries will no longer have the life expectancy option regarding inherited retirement plan accounts. Instead they will be required to distribute the inherited account in its entirety 10 years from the date of death of the IRA holder. Individuals who are exempt from this limitation are the IRA holder’s spouse, a beneficiary less than 10 years younger, a chronically ill beneficiary, and a beneficiary who has not reached age of majority (minor). The minor beneficiary will revert to the 10-year option once they reach adulthood. 

Penalty-free Withdrawals for Qualified Birth or Adoption

The legislation provides penalty-free withdrawals from retirement plans for any “birth or adoption distributions.” A couple can distribute up to $5,000 each (total of $10,000) from their retirement plans for birth or adoption expenses. The child’s name and tax identification number must appear on the individual’s tax return within 1 year of the birth or finalized adoption. 

Treating Taxable Non-Tuition Fellowship and Stipend Payments as Compensation

Stipends and non-tuition fellowship payments received by graduate and postdoctoral students will now be treated as compensation for IRA contribution purposes.

Treating Excluded Difficulty of Care Payments as Compensation

Home healthcare workers typically do not have a taxable income because their “difficulty of care” income is considered nontaxable under IRC Code section 131. With the amendments to IRC sections 415(c) and 408(o) difficulty of care payments will be treated as compensation for the purposes of calculating the contribution limits to defined contribution plans and IRAs.

Plans Adopted by Filing Due Date May Be Treated as in Effect as of Close of Year

For plans starting after December 31, 2019, employers may establish a qualified plan up until their tax return due date plus extensions. This is contrary to the 2019 rule that a plan must be established by the end of the employer’s fiscal tax year, and for a calendar year plan, it would be December 31, 2019.

Increased Credit Limitation for Small Employer Pension Plan Start-Up Costs

Small employers (i.e., employers with less than 100 employees who received $5,000 in the preceding year and have at least 1 rank and file employee) can receive a tax credit for establishing an employer plan, provided that they haven’t had any employer plan for three years prior. The credit will be the greater of a) $500 or b) $250 for every rank and file employee capped at $5,000. The employer may take the credit for up to three tax years.

Small Employer Automatic Enrollment Credit

An additional $500 tax credit is available for employers who adopt an automatic contribution arrangement. The credit applies to 401(k) plans and SIMPLE IRA plans. An Automatic Contribution Arrangement (ACA), automatically deducts a percentage of an individual’s wage as an employee deferral contribution into the plan unless the employee elects not to participate in the deferral plan. 

There are several unanswered questions regarding changes of these rules. A forthcoming pronouncement will clarify navigation of the new rules.

There are additional changes to the law that affect other plans such as regular 401(k) profit sharing plans. This article covers the significant changes to IRAs and Individual 401(k) plans.