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Congress passes the SECURE ACT, what do the changes mean for me?

Attached to the large spending bills that Congress passed just before the end of the 2019 legislative session were some last-minute provisions that will have an impact on personal finances in 2020 and beyond.  The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act includes some important changes to the rules regarding Individual Retirement Accounts (IRAs), as well as some narrower changes to other aspects of the tax code. The following is a high-level update on a few of the items that are likely to have the widest and largest impact.

  • No maximum age for Traditional IRA contributions.  Prior law prevented taxpayers from making contributions to their traditional IRA once they reached the age of 70 ½.  The new law repeals the age 70 ½ limitation.  This change also aligns the traditional IRA contribution rules with the Roth IRA contribution rules.  Keep in mind a taxpayer, or their spouse, must have earned income in order to make either a Roth or Traditional IRA contribution.
  • The required beginning date for RMDs (Required Minimum Distributions) from IRAs and other qualified retirement plans is increased to 72.  Prior law required taxpayers to begin their RMDs no later than April 1st of the year following the year they turned 70 ½.  The new law changes the required beginning date to April 1st of the year following the year they turn 72.  However, for anyone attaining 70 ½ prior to 12/31/2019 will still be subject to the old rules.    
  • Despite the increase in the required beginning date to 72, the legislation did not change the date that taxpayers can make QCDs (Qualified Charitable Distributions).   Once a taxpayer reaches the age of 70 ½, they can distribute up to $100,000 per year directly from their IRA to a qualified charity and avoid claiming the income on page 1 of their individual income tax returns.  Given the 2017 tax law expanded the standard deduction amounts, this will continue to be a good planning opportunity for taxpayers who have reached the age of 70 ½. 
  • New 10-year rule for post-death distributions from IRAs and qualified retirement plans.  Prior law provided beneficiaries more opportunities to stretch post-death distributions over the beneficiary’s lifetime.  For employees or IRA owners who die after 12/31/2019, the new law requires all funds to be distributed from the plan within 10 years of death unless the designated beneficiary meets one of the following qualifications: 1) Surviving spouse of the employee or IRA owner; 2) Minor child of the employee or IRA owner (10-year clock starts at age of majority); 3) Chronically ill beneficiaries; 4) Any other individual who is not more than 10 years younger than the deceased plan owner. In addition to the introduction of the 10-year rule, the new legislation includes additional changes to the treatment of inherited IRAs that may spur adjustments to existing estate plans in relevant situations.
  • “Kiddie Tax” rules revert to prior tax law.  As part of the massive tax code overhaul in 2018, Congress changed the provisions of the so called “Kiddie Tax” – while a child’s unearned income had previously been taxed at their parents’ tax rate, the new law taxed such income using the trust and estate tax brackets, in an attempt to simplify the filing process.  However, in many cases this change in process resulted in an unintended increased tax burden on those returns.  The SECURE Act effectively unwinds that 2018 change, and reverts the Kiddie Tax to its prior structure, based on parents’ tax rates. This move will generally be a positive one, and Congress has allowed the change to apply retroactive to 2018, but the ultimate impact will depend on each taxpayer’s specific situation.
  • Expanded opportunities for qualified 529 plan distributions.  Effective 12/31/2018, taxpayers may now distribute up to $10,000 (lifetime limit per taxpayer) from 529s to pay towards student loan debts.  The student loan provision allows for distributions to a sibling of the designated beneficiary.  In addition, the qualified higher education expense definition has been expanded to include costs to pay for registered apprenticeship programs. 

These are just a few of the provisions contained in the recent legislation that will impact planning opportunities for 2020 and beyond.

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