Top 8 Changes to the SECURE Act

Hot off the presses for the Bradford Tax Institute! Congress passed some tax legislation just before the holidays and as you can imagine, it's changed some things. Specifically, concerning you - the small business owner - and your retirement savings. 

Not anywhere near retirement, you say. Well don’t click that BACK button just yet. Whether young or old, these changes could affect you and it’s in your best interest to be aware of them. 

Here’s what you need to know. 

A new law called the Setting Every Community Up for Retirement Enchantment Act of 2019 (SECURE Act) has made many changes to how you save money for retirement, how you use that money, and how you can better use your Section 529 plans.  

BTW, for the record: There are many meaningful changes that could be made to satisfy the implication of the SECURE Act. BUT instead we got this pork largely making small changes that only make a complicated system even more so.  Also, some of the pork used to satisfy the large insurance and Wall Street firms is NOT listed in this article.   

Just putting that out there, folks. 

Now, back to these SECURE Act changes. The Bradford Tax Institute has identified eight primary changes that could affect you. Note that except for point #7, each change applies to plans adopted for tax years beginning AFTER December 31, 2019.  

The changes are:  

1.) New tax Credit for automatic contribution retirement plans. 

Effective for tax years beginning after December 31, 2019, if your business has a 401(k) plan or a SIMPLE plan that covers 100 employees or less, and it implements an automatic contribution arrangement for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution. 

(Tax Tip: The credit can apply to both newly created and existing retirement plans.) 

2.) Graduate students and postdocs can contribute to an IRA based on their taxable support income. 

Previously, certain stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not as compensation for IRA proposes. Thus, they could not be used for IRA contributions.  

The SECURE Act removed this obstacle by stating that ‘compensation’ shall include any amount paid to an individual to aid in the pursuit of graduate or postdoctoral study. 

This change enables students to begin saving for retirement and accumulating tax-favored retirement savings - if they have any funds available. 

(Tax Tip: If your child pays no income tax or pays tax at the 10% or 12% rate, consider contributing to a Roth IRA instead of a traditional IRA.) 

3.) No age limit on traditional IRA contributions. Originally you couldn't contribute funds to a traditional IRA if you were over 70½ years old. Now you can make a traditional IRA contribution at any age, just like with a Roth IRA. 

BUT there is a cost: If you want to make a tax-free qualified charitable distribution (QCD) from your traditional IRA, then you have to reduce your tax-free distribution (but not below $0) by:

• the total traditional IRA contribution deductions taken after age  70½, less
• all prior reductions you made to your tax-free QCDs before  the current tax year.  

(Tax Tip: If you pay tax on some or all of your IRA distribution to a charity, then you can deduct that amount on Schedule A as a charitable contribution.) 

4.) No 10 percent penalty on qualified birth or adoption distributions. 

You pay no 10% early withdrawal penalty on IRA or qualified retirement plan distributions if the distribution is a qualified birth or adoption distribution. The maximum penalty-free distribution is $5,000 per individual per birth or adoption. For this purpose, a qualified plan does not include a defined benefit plan.

Remember, this is only a penalty exception – you still pay income tax on the distribution.  

A qualified birth or adoption distribution is any distribution from an IRA or a qualified retirement plan if made during the one-year period beginning on: 

• the date of birth of a child, or 
• the date a legal adoption of an eligible adoptee in final.

An eligible adoptee is any individual (other than a child of your spouse: who is: 

• under the age of 18, or 
• physically or mentally incapable of self-support.

You can repay a qualified birth or adoption distribution and treat it as a 60-day trustee-to-trustee rollover provided you are eligible to make rollover contributions to the account. The repayment avoids paying income tax on the distribution. Remember, the adoption/birth distribution is penalty-free but NOT tax-free. 

(Tax Tip: A birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distribution as soon as January 1, 2020.) 

5.) RMDs now delayed to age 72. 

Previously, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified plan in the tax year you turned age 70½. Now you can wait until the tax year you turn age 72.  

This change applies to RMDs after December 31, 2019 if you turn age 70½ after that date.  

(Tax Tip: The RMD requirement does NOT apply to the Roth IRA.) 

6.) Retirement plans opened by the due date of the tax return allow deductible contributions for that tax year. 

If you adopt a stock bonus, pension, profit-sharing, or annuity plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year. 

7.) More ways to take tax-free distributions from your Section 529 plan. 

Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are: 

• investments into the plan (your basis), or 
• used for qualified higher education expenses. 

Qualified higher-education expenses now include: 

• fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act, and  
• principal or interest payments on any qualified education loan of the designated beneficiary or their siblings.  

If you rely on the student loan provision to make tax-free Section 529 plan distributions: 

• there is a $10,000 maximum per individual loan holder, and 
• the loan holder reduces their student loan interest deduction by the distributions, but not below $0. 

(Tax Tip: You can use the new qualified expenses categories to identify tax-free Section 529 distributions that are retroactive to 2019.) 

8.) New rules for taking money out of inherited retirement accounts. It used to be you could “stretch” out the account and take RMDs each year to deplete the account over many years. Now, if you inherit a defined contribution plan or an IRA, you must fully distribute the balances of these loans by the end of the 10th calendar year following the year of death. There is no longer a requirement to take out a certain amount each year. 

The current stretch rules, and not the new 10-year period, continue to apply to a designated beneficiary who is: 

• a surviving spouse, 
• a child who has not reached the age of majority, 
• disables as defined in Code 72(m)(7), 
• a chronically ill individual as defined in Code Section 7702B(e)(2) with modification, or 
• not more than 10 years younger than the deceased.  

So there you have it! Clear as mud, right?  

If you’re confused as to which (if any) of these changes apply to you and how you can best implement them on your tax returns, remember a Certified Financial Planner (CFP) can help clear things up for you.   

** All written content is for information purposes only. Material presented is believed to be from reliable sources. No representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. **