Congress recently passed, and the President signed into law, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement planning situation.
Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals.
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, as long as the individual has compensation, which generally means earned income from wages or self-employment.
Required minimum distribution age raised from 70½ to 72 for IRA owners and retirement plans participants. For individuals born after June 30, 1949, your first RMD (required minimum distribution) will not be until the year that you turn 72.
Partial elimination of stretch IRAs. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary's life or life expectancy. However, for deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant's or IRA owner's death (10-year rule).
Exceptions to the 10-year rule are allowed for 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.
Expansion of 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans. Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments. But for distributions made after December 31, 2018 (the effective date is retroactive) tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the beneficiary's participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on the qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.
Kiddie Tax changes. The new rules enacted on December 20, 2019 repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 or 2019) the unearned income of children is taxed under the pre-TCJA rules and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.
