Posted In: Trusts & Estates
By Lori R. Kilpeck on March 18, 2020
In the midst of this election year and other political hubbub, you may have heard that the government recently passed a new tax act. The name given to this newest tax act reflects what the government is trying to accomplish with these new tax laws which is to encourage tax saving without losing tax revenue. Here is a summary of six things the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act") does and a short description of the one very big change intended to pay for it all.
The SECURE Act delays the age when a person must begin taking distributions from a retirement plan.Prior to the SECURE Act, a person had to begin taking distributions from retirement accounts, like IRAs and 401(k) plans, at age 70½. The SECURE Act increases that age to 72. By pushing back the age when a person must start taking distributions from a retirement plan, the government is banking on individuals working longer, living on non-retirement assets, and stretching their retirement account balances further into their retirement years. For individuals who do not take distributions until the required age, assets in a retirement account stay tax-free for a longer period of time.
The SECURE Act allows a person of any age with earned income to contribute to a traditional IRA.Prior to the SECURE Act, an individual over the age of 70½ was prohibited from contributing to a traditional IRA. The SECURE Act now allows any individual with earned income to contribute to a traditional IRA. By eliminating this age cap, the government is acknowledging that many individuals are working longer and it is permitting those individuals to make tax deductible contributions toward retirement past the traditional retirement age.
The SECURE Act expands the criteria for participation in employer sponsored retirement plans to include “long-time, part-time employees”.Prior to the SECURE Act, employer-sponsored retirement plans could require an individual to work at least 1,000 hours a year in order to be eligible to participate in the plan. The SECURE Act now mandates that individuals who work at least 500 hours a year in three (3) consecutive years must also be allowed to participate in an employer-sponsored retirement plan. By expanding the criteria for participation to long-time, part-time employees, the government is hoping to expand the number of individuals contributing to retirement plans.
The SECURE Act allows withdrawals from certain tax deferred accounts for adoption expenses and pay back of student loans.The SECURE Act creates two (2) new types of early, penalty-free distributions from certain tax-deferred plans. An individual can withdraw up to $10,000 a year from a 529 account without being subject to penalty if those funds are used to pay back student loans. An individual can also now withdraw up to $5,000 from a retirement plan free of penalty if those funds are used to pay for adoption expenses.
The SECURE Act makes it easier for small business owners to establish certain “safe harbor” retirement plans.Prior to the SECURE Act, employers could automatically enroll employees in certain “safe harbor” retirement plans up to 10% of wages. Under the SECURE Act, employers can automatically enroll employees up to 15% of wages. By increasing the wages cap, the government is hoping to incentivize more employers to establish and maintain retirement plans in hopes that increasing the number of plans will increase the total number of individuals participating in plans, as well as, the overall level of retirement savings.
The SECURE Act will make up for taxes deferred or lost because of these changes by requiring that IRAs must be fully distributed by the tenth year after the death of the original account owner with certain exceptions.
Prior to the SECURE Act, generally speaking, when a person with an IRA died, the individual who inherited that IRA was required to take distributions from the IRA, even if the individual was under 70½, but could stretch out those distributions using an actuarial life expectancy calculation. Under the SECURE Act, except in the case of certain types of beneficiaries (an eligible designated beneficiary or “EDB”), an inherited IRA must be fully distributed by the tenth (10th) year after the death of the original owner. The most important exception to this rule is when the benefits are left to a surviving spouse who will be able to continue to do a spousal rollover to his or her own IRA and defer taking out any withdrawals until he or she attains the age of 72. Because distributions from IRAs are subject to income tax, the maximum tax deferral on an inherited IRA for most individuals (other than a surviving spouse) is now limited to ten (10) years. Actuarial, life expectancy withdrawals are still allowed for EDBs, which include minors and certain disabled individuals. However, as often happens with new tax laws, it is currently unclear who qualifies as an EDB, especially for IRAs that pass to a trust. It will be some time before clarity is provided in the form of Regulations, so individuals should review their 401(k) and IRA beneficiary designations, the provisions of any designated trusts, and their investment strategies to be sure that all of this works together to accomplish the desired estate and retirement planning objectives.
If you have questions about your IRA and how the changes caused by the SECURE Act will impact your heirs, please contact a member of our Estate, Succession Planning & Probate Administration Practice Group for more information.
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