On December 20, 2019, the President signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Our experts have pulled together some highlights of how the new tax law may affect you.
Repeal of the maximum age for traditional IRA contributions
Starting in 2020, an individual of any age can make contributions to a traditional IRA as long as they have compensation (earned income, wages or self-employment income). Prior to 2020, an individual was not allowed to make any more contributions to traditional IRAs once they reached age 70 ½.
Required minimum distribution age raised from 70 ½ to 72
Individuals who reach age 70 ½ after December 31, 2019, can now wait until age 72 to take their required minimum distribution. The old law required retirement plan participants and IRA owners to take distributions starting on April 1 of the year following the year in which they reached 70 ½.
Qualified charitable deduction exclusion
Prior law allowed up to $100,000 per year of qualified charitable distributions from a traditional IRA or Roth IRA to be excluded from tax.
The new law reduces the qualified charitable distribution exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after the taxpayer turns age 70 ½ over the amount of all prior year reductions. (This is confusing, so please speak to your Armanino advisor if you have questions.)
Partial elimination of “stretch” IRAs
Prior law allowed the owner of certain retirement plans to name a “designated” beneficiary, such as a son or daughter (or certain trusts for the benefit of a son or daughter), and after the death of the owner, the retirement plan could be paid out over the life expectancy of the son or daughter. Many of our clients use this technique to defer the income tax consequences of large IRAs. A designated beneficiary is defined as an individual or certain “see-through” trusts where life expectancy can be used to calculate the required minimum distributions when the owner dies.
The new law states that this so-called “stretch IRA” is no longer a possibility, and the maximum pay-out period is now limited to 10 years. The SECURE Act also added a new definition of beneficiary. All designated beneficiaries must withdraw benefits within 10 years following the owner’s death UNLESS the beneficiary meets one of the following exceptions, in which case they can still use the life expectancy payout:
- A surviving spouse may still use life expectancy.
- A minor child may use life expectancy until they reach the age of majority (generally 18 years of age) before the 10-year rule takes effect.
- A disabled beneficiary may use life expectancy until death.
- A chronically ill beneficiary may use life expectancy until death.
- A beneficiary who is less than 10 years younger than the owner of the retirement plan may use life expectancy for pay-out until death.
The rules for beneficiaries who are NOT designated beneficiaries still apply, such as the 5-year rule for an estate named as a beneficiary, the rules for a charity, and rules for certain trusts that do not qualify as a see-through trust.
Expansion of Section 529 education savings plans
Retroactive to distributions made after December 31, 2018, plan funds may now be used for fees, books, supplies and equipment required for the designated beneficiary’s participation in an apprenticeship program. In addition, tax-free distributions of up to $10,000 are now allowed to pay the principal and interest on a student loan of the designated beneficiary or on a loan for a sibling of the designated beneficiary.
Change in the “Kiddie Tax” - AGAIN
Back in 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made changes to the so-called “kiddie tax,” which is a tax on the investment income of children. Before the TCJA, the investment income of a child was taxed at the parent’s rate if the parent’s rate was higher. Under the TCJA, the income of the child was to be taxed according to the tax brackets applicable to trusts and estates (which reach the highest marginal tax rate at just over $12,000 of income). This rule seemed unfair, and so it has been re-written.
The new rules starting in 2020 (with the option to start retroactively in 2018 and/or 2019) tax the investment income of a child at the parent’s rate if the parent’s rate is higher, which is the pre-TCJA rule.
Penalty-free withdrawals from retirement plans for expenses related to the birth or adoption of a child
Typically, distributions taken from a retirement plan prior to age 59 ½ are subject to a 10% withdrawal penalty (with some exceptions). Starting in 2020, retirement plan distributions up to $5,000 that are used for expenses related to the birth or adoption of a child are not subject to the 10% early withdrawal penalty.
Taxable non-tuition fellowship and stipend payments can now be treated as compensation
Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes. Starting in 2020, such payments are now considered compensation, allowing students to begin saving for retirement right away by creating an IRA, which requires a level of compensation.
Impact on nonprofit organizations
The SECURE Act brings a couple of specific changes for nonprofits:
- Modification of the excise tax on net investment income from the two-tiered 1%/2% to a flat 1.39%
- Retroactive repeal of the increase in UBIT for certain fringe benefit expenses
As with any significant tax change, there are a lot of details to work though. Contact Pam Dennett, Tax Director for Armanino LLP and Moore U.S. National Tax Office expert for Trust & Estate, at any time if you have questions or would like to discuss how the SECURE Act may impact you.
Pamela A. Dennett, CPA, CFP
U.S. National Tax Office
If you have additional questions, please contact your GTN client service team or contact us at firstname.lastname@example.org or +1.888.486.2695, or visit our Mobility Tax Services page to see what assistance we can provide.
The information provided above is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.