The SECURE Act - Significant Changes for IRAs and 401(k)s – Part I

Posted on Thu, Jan 02, 2020 ©2021 Drucker & Scaccetti

retirement-income-planning-resized-600By: Beth Gaasbeck, CPA, MBA and Robert N. Polans, CPA, MT, PFS

 

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) as part of the Further Consolidated Appropriations Act, 2020, effective 1/1/2020.  Not exactly a Holiday present, there are favorable and unfavorable provisions impacting your retirement planning.  In this two-part series, we will take a closer look at the highlights under the  law.

 

Several notable provisions include:

  • Increase in the age to take required minimum distributions from 70 ½ to 72
  • Removal of age restrictions for making IRA contributions
  • Shortened timeline for taking post-death required minimum distribution rules (elimination of “stretch” IRAs)
  • 401(k) eligibility for part-time employees working at least 500 hours per year for 3 consecutive years and who are at least 21-years old
  • Penalty-free retirement withdrawals (up to $5,000 per spouse) for birth or adoption-related expenses
  • Increase in the 401(k) automatic safe harbor enrollment cap from 10% to 15%
  • Increase in the maximum small business credit for retirement plan startup costs (from $500 to $5,000) and a new small business tax credit (up to $500 per year) for startup costs of a new 401(k) or SIMPLE IRA plan that includes automatic enrollment
  • Prohibition of 401(k) loans provided through credit cards or similar arrangements

In Part I, we start off with good news.  Part II, however, will include some troubling news including the elimination of the “Stretch” IRA and how that impacts the rules for post-death required minimum distributions.

 

Required Minimum Distribution Age – Increased from 70 ½ to 72 (After 2019)

Pre-SECURE Act Law:

  • IRA owners and participants in employer-provided retirement plans who own 5% or more of the company were required to begin taking Required Minimum Distributions (RMDs) from their plan by April 1st of the year following the calendar year when they reached age 70 ½ (even if the employee or IRA account owner continued to work after age 70 ½). This April 1st date is called the Required Beginning Date (RBD).
  • Participants in employer-provided retirement plans who do not own 5% or more of the company delayed taking RMDs until April 1st of the year after the year they retire.

SECURE Act (New) Law:

  • Applies only for participants who turn age 70 ½ after December 31, 2019, the age for RMDs (as described above) increased from 70 ½ to 72-years old.

The increase in age for taking RMDs under the Act is beneficial as it allows retirement plans to grow longer without being depleted by RMDs and it defers the recognition of taxable RMD distributions. 

This new provision also eliminates much of the confusion surrounding the determination of when RMDs had to be taken under the age 70 ½ rule, since the RMD for those whose 70th birthdays were after June 30th of the age 70 year, had a different RMD date than those whose 70th birthdays were before July 1st of the age 70 year.

Participants in employer-provided retirement plans who do not own 5% or more of the company can still delay taking RMDs until April 1st of the year after the year they retire.

 

Repeal of Maximum Age for Traditional IRA Contributions

Pre-SECURE Act Law:

  • Contributions to traditional IRAs could not be made for years in which the individual reached age 70 ½.

SECURE Act (New) Law:

  • For contributions made after December 31, 2019, individuals regardless of their age can contribute to traditional IRAs, if they meet other non-age-related requirements.

The repeal of the age 70 ½ limit for IRA contributions allows individuals who work past age 70 ½ to continue to max out traditional IRA contributions, take the tax deduction and build retirement funds for when they are needed. 

 

If you are approaching age 70 ½ but will not reach this age until after 2019, you can now delay taking your RMDs (and the taxable income that comes with it) for another 1 – 2 tax years and continue to make tax-deductible contributions if you are still working. 

 

Check your inbox or our LinkedIN page for Part II tomorrow. If you have a retirement plan and would like to discuss how the changes brought about in the SECURE Act affect you, call on The Tax Warriors® at Drucker & Scaccetti.  We have experienced and highly skilled advisors prepared to help you review your retirement plans and identify changes that may be needed.  

 

Go to Part II

Topics: Roth IRA, retirement plans, IRA, 401(k), RMDs, Required Minimum Distributions, beneficiaries, Safe harbor enrollment cap, SECURE act, Stretch IRAs

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