A new piece of legislation enacted in late December will help simplify the retirement system and help individuals increase their savings.
The “Setting Every Community Up for Retirement Enhancement” Act or SECURE Act, which was part of the Further Consolidated Appropriations Act of 2020 expands opportunities for individuals to increase their savings, and makes administrative simplifications to the retirement system.
Among the major changes for individuals are:
- The repeal of the maximum age at which traditional IRA contributions can be made, but still require earned income of at least the amount being contributed.
- Increase the age at which required minimum distributions (RMDs) must be taken, from the age of 70 ½ to the age of 72 for taxpayers reaching the age of 70 ½ after Dec. 31, 2019
- Modification of the RMD rules with respect to defined contribution plan and IRA balances upon the death of the account owner to include the requirement that after an employee (or IRA owner) dies, the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death rather than allowing the beneficiary to “stretch” the minimum distributions over their own life expectancy. An exception applies for “eligible designated beneficiaries.
- Allowance for tax-free distributions from 529 plans to pay for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program and, for the payment of principal or interest on a qualified education loan of the designated beneficiary or a sibling of the designated beneficiary.
- Reversion of the “kiddie tax” law changes which applies to children under the age of 19, or the age 24 for full-time students, back to pre-TCJA provisions taxing the child’s unearned income at the same Federal tax rate that their parent’s pay.
- Provides for penalty-free withdrawals from “applicable eligible retirement plans” for a “qualified birth or adoption distribution.”
- Provides that “compensation” include any amount that is included in an individual's gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study such as fellowships, stipends, or similar amounts.
- Includes a number of provisions that impact employer plans, such as liberalized rules for multiple employer retirement plans, a new small employer automatic enrollment credit, and an increased credit for small employer pension startup costs.
- Allows qualified long-term, part-time workers to participate in an employer's 401(k) plan.
- Administrative changes and revenue-raising provisions, including increases to the penalty amounts for failure to file income tax to the lesser of $400 or 100% of the amount of tax due.
To learn more about how this legislation may impact you, please reach out to the Zinner and Company tax team.