Tax Implications of the SECURE Act

Congress passed new tax legislation around the holidays this past year. Called the SECURE Act, it stands for Setting Every Community Up for Retirement Enhancement Act of 2019. We have summarized a few of the more relevant changes you might need to know.

Required Minimum Distribution Relief for Retirement Plans

Before the SECURE Act, if you had money in a traditional Individual Retirement Account (IRA) or an employer-sponsored retirement plan and were retired, you were required by law to start making withdrawals at age 70 ½. But for people who haven’t hit 70 ½ by the end of 2019, the SECURE Act pushes out the RMD start date for most situations until age 72. This change applies to RMD’s after December 31, 2019, if you turn 70 1/2 after that date.

Increased Savings Opportunities

The SECURE Act also increased retirement savings opportunities in a number of ways. Before this law, you couldn’t contribute to a tax-deductible IRA after 70 ½. But with the SECURE Act, you can. So, if you plan on working into your 70s, you can still put money into a deductible IRA. Those over 70 ½ in 2019 won’t be able to save in an IRA for this year. This law change means a couple over 70 ½ will be allowed to save to an IRA over $14,000 in 2020 if both spouses are contributing the maximum of $7,000 a year. This can help them receive a valuable tax deduction and save for the future.

No 10% Penalty for Birth/Adoption Withdrawals

Provides an exception to the 10% early withdrawal tax for qualified birth or adoption distributions from an applicable eligible retirement plan made after December 31, 2019. The maximum aggregate amount that may be treated as qualified birth or adoption distributions by any individual is $5,000.

IRA Post-Death Required Minimum Distribution Rules.

The SECURE Act limits the use of “Stretch IRAs” by requiring an individual’s entire interest in an IRA to be distributed to a designated beneficiary within 10 years after the death of the employee, whether or not distributions of the employee’s interest have begun.

Expanded 529 Plan Distributions

Provides that tax-free treatment for higher education expense distributions also applies to certain expenses for: (1) a registered apprenticeship program’s required fees, books, supplies, and equipment; and (2) qualified education loan repayments of up to $10,000, with a separate accounting for siblings. Please note that the deduction for student loan interest is reduced by distributions for loans that are treated as qualified higher education expenses. Effective for distributions made after December 31, 2018.

Increase in Penalty for Failure to File

Where an income tax return is more than 60 days late, the failure to file penalty cannot be less than $435, Applicable to returns the due date for which (including extensions) is after December 31, 2019.

Small Employer Automatic Contribution Tax Credit

If your business has a 401(k) plan or a SIMPLE plan that covers 100 or fewer employees, and you implement an automatic contribution arrangement for employees, you qualify for a $500 per year general business tax credit. The employer may take the credit for up to three years for (1) startup costs for a qualified employer plan (e.g., §401(k), SIMPLE IRA) that includes automatic enrollment, or (2) for costs for converting an existing plan to an automatic enrollment design. Effective for taxable years beginning after December 31, 2019.