Provided by Nina Azwoir
On Friday December 20, 2019, a major overhaul of the rules for retirement plans and IRAs, known as the SECURE Act, was signed into law. Generally effective on January 1, 2020, the bipartisan law is primarily taxpayer friendly, encouraging savings in various ways and making it easier for employers to offer retirement plans. Summarized below are the key changes impacting retirement plans and tax provisions.
Increased Flexibility in Retirement and Education Savings Accounts
Repeal of Maximum Age for Traditional IRA Contributions
The new law ends the age restriction on contributions to a traditional IRA once the individual has attained the age of 70 ½. As Americans live longer, an increasing number continue employment beyond the traditional retirement age. Therefore, taxpayers with earned income can make IRA contributions at any age beginning in 2020.
Increase Age for Required Minimum Distributions
Under previous law, participants are generally required to begin taking distributions from their retirement plans at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The new law increases the required minimum distribution age from 70 ½ to 72 for people who turn 70 ½ after December 31, 2019.
Penalty-free Withdrawals for Birth or Adoption
While the previous law exempts certain distributions from qualified plans from the 10% tax penalty on early withdrawals prior to age 59 ½, the new law now includes “qualified birth or adoption distributions” as qualifying for such penalty-free withdrawals.
Annuity Portability Options
The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This annuity portability change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.
Allowable 529 Plan Withdrawals Expanded
The new law expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.
New Ways to Save More in Employer Plans
401(k) Plan Safe Harbor Rules
The legislation includes various changes designed to provide greater flexibility, improve employee protection and facilitate plan adoption. It streamlines the safe-harbor notice requirement for non-elective contributions but maintains the requirement allowing employees to make or change an election at least once a year.
Part-time Workers Participation in 401(k) Plans
Under previous law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. As women are more likely than men to work part-time, these rules can
be quite harmful for women in preparing for retirement. Except in the case of collectively bargained plans, the new law will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.
Credits for Small Business Owners
Increase Credit for Start-Up Costs
Prior to the new law, small businesses could claim a credit equal to 50% of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit limit up to a maximum of $5,000 for each of the first three years effective for 2020 and later years.
Automatic Enrollment Credit
To encourage greater employee participation in qualified retirement plans, the legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.
Nina Azwoir – Financial Advisor
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