Changes are coming that will affect your IRAs, 401(k)s, 529s, and more. Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) of 2019 and the President signed it into law in late December. This is a hefty bill with a lot of information, so we’ve outlined some of the most significant changes here, but for more information or if you have questions, be sure to talk to your advisor.
First, let’s talk about how SECURE Act Retirement Changes Affect IRAs. There are several new IRA rules now in place. One of the most notable changes is the elimination of the so-called “stretch” provision for most non-spouse beneficiaries of inherited IRAs and other retirement accounts. Starting in 2020, most designated beneficiaries who inherit an IRA will need to abide by the 10-year rule. This rule requires that the entire inherited retirement account must be distributed by the end of the 10th year following the year of inheritance. Designated beneficiaries will have flexibility when it comes to the timing of the distribution as long as the entire account is distributed within that 10-year time frame. There are a few beneficiaries who will have exceptions to the 10-year rule: spouses, disabled individuals, anyone chronically ill, people who are not more than 10 years younger than the decedent, and certain minor children of the original account owner.
Another big change to IRAs is the age for Required Minimum Distributions (RMDs). This has been increased to 72, up from 70 ½. People turning 70 ½ in 2020 do not need to take RMDs until age 72. However, those that turned 70 ½ in 2019 are still required to take distributions.
Here are some other IRA changes:
- For a qualified birth or adoption, there’s now a penalty-free distribution of up to $5,000.
- Taxable non-tuition fellowship and stipend payments are now treated as compensation (income) for IRA purposes.
- Contributions can now be made to traditional IRAs beyond age 70 ½ if an individual has compensation/earned income.
Now let’s talk 401(k)s. The SECURE Act retirement changes opens the door for more employers to offer annuities as an investment option within 401(k)s. This is an effort to put a guaranteed income option in a 401(k) since many companies no longer offer pensions. The fiduciary responsibility for those annuities used to fall to employers, but now that responsibility will go to insurance companies that sell annuities. The plan must be reviewed by the insurer on an annual basis to check that it’s financially sound and annuities are offered at a reasonable cost.
Another big change is part-time employees will be eligible to participate in 401(k) plans. Starting in 2021, if an employee worked at least 500 hours in three consecutive years they can defer into the company 401(k) plan. However, they will not be required to receive any matching contributions and won’t be included in the discrimination tests, which ensure 401(k) plans are not favoring employees with higher incomes.
There are now incentives for small businesses to create 401(k)s for their employees. Employers with less than 100 employees who start a retirement plan are eligible for tax credits for the first three years. These credits could be potentially up to $250 per employee with a maximum credit of $5,000. In addition, small employers that adopt automatic enrollment can receive a $500 per year tax credit for up to three years. And small businesses can now pool together with any other small businesses to offer these retirement plans. The “one bad apple” rule is also gone, so if one employer fails to meet the plan requirements it does not affect the other employers in the pool.
Here are some other 401(k) updates:
- For plans that utilize the Safe-Harbor auto-enrollment escalation, the amount has been raised from 10% to 15%.
- Just like with IRAs, 401(k) participants can now withdraw up to $5,000 penalty-free to cover the costs related to the birth or adoption of a child.
Other notable changes coming from the SECURE Act involve disasters, 529s, and the Kiddie Tax. People can now take qualified disaster distributions from their retirement accounts. This means if they have a home in a federally declared disaster area and suffered an economic loss they can take up to $100,000 from a retirement account without the 10% early withdrawal penalty.
When it comes to 529s, the SECURE Act allows someone to take up to $10,000 from a 529 and put it towards student loan payments.
As for the Kiddie Tax, the SECURE Act reverses a move by the Tax Cuts and Jobs Act. The latter had made it so a child’s unearned income was taxed at the much higher trust tax rates. Now, it is reverting back so that a child’s unearned income will be taxed at the parent’s tax rate. We get this question a lot about what the tax rate is for the Kiddie Tax —rest assured it’s now back to the lower rate of the parent’s tax rate and parents can elect for this change to apply to taxable years in 2018 and 2019.
We covered a lot of ground with this blog post quickly. Remember, there’s much more detail to the new SECURE Act, so don’t hesitate to reach out to your advisor to learn more and get your questions answered!
Fort Pitt Capital Group will continue to write blog posts about the SECURE Act retirement changes and more through the year. If you have any questions, please do not hesitate to contact one of our financial advisors.