The “Setting Every Community Up for Retirement Enhancement” Act (referred to as the SECURE Act), passed in the Senate on December 19, 2019 as part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865). It was signed into law by President Trump on December 20, 2019 as part of a funding package. This bill modifies many requirements for employer-provided retirement plans, individual retirement accounts (IRAs), and other tax favored savings accounts. There are 29 specific provisions in the SECURE Act. Certain provisions go into effect retroactively or upon enactment, while others have future effective dates. Below are comments on some of the more significant provisions of the SECURE Act:
Change in age for required minimum distribution (RMD)
Under prior law, participants in employee-provided retirement plans and IRA owners were generally required to begin taking their RMD by April 1 of the following year upon turning 70 ½ years old. A less than 5% owner could delay taking RMD until April 1 after their retirement year. The SECURE Act changes the initiation of the RMD from age 70 ½ to age 72. The SECURE Act applies to individuals who attain the age 70 ½ after December 31, 2019.
Repeal of maximum age for IRA contributions
Under prior law, no deduction was allowed for any qualified retirement contribution to a traditional IRA for an individual over 70 ½. The SECURE Act allows contributions to traditional IRAs after age 70 ½.
Modifies post-death RMD rules
This provision will be one of the more significant changes of the SECURE Act. RMD rules apply to employer-sponsored retirement plans and IRAs.
Under the previous law, while an employee was alive and over 70 1/2, distributions of the individual’s interest were required to be paid-out over the life expectancy of the employee. And, after death, the RMD could be paid over the life expectancy of the beneficiary. This has been commonly referred to as a Stretch IRA.
Under the SECURE Act, the general rule is that when an employee or IRA owner dies, the remaining account balance must be distributed to the designated beneficiaries within 10 years of the date of death. The new law is for an employee or IRA owner who dies after December 31, 2019. There are a few exceptions to the new 10 year rule. Amongst others, these exceptions include, when the spouse of the employee or IRA owner is the beneficiary, or, the beneficiary is the child of the employee or IRA owner who has not reached majority.
Expansion of IRC §529 plans
A 529 plan is a tax-exempt program that generally allows any person to make nondeductible contributions into a plan for the educational benefit of a designated beneficiary. The earnings in a 529 plan accumulate tax-free. Distributions from the 529 plan are excluded from taxable income if they pay for qualified higher education expenses.
Under the SECURE Act, tax-free distributions from 529 plans can also pay for fees, books, supplies, and equipment required for a designated beneficiary’s participation in an apprenticeship program. The program must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.
In addition, the SECURE Act allows tax-free distributions from 529 plans to pay principal or interest on a qualified education loan of the designated beneficiary or a sibling of the designated beneficiary.
Expands 401(k) coverage for part-time employees
Under prior law, employers generally could exclude part-time employees (working less than 1,000 hours per year) when providing a defined contribution plan to their employees.
The SECURE Act now provides that a §401(k) plan must allow an employee to make elective deferrals. To qualify, the employee must have worked at least 500 hours per year with the employer for a minimum of three consecutive years and reached age 21 by the end of the third consecutive year period.
There are 24 other provisions in this bill including allowance of penalty-free IRA withdrawals for childbirth and adoption, allowance of unrelated employers to band together to create pooled employer plans, and, changes to the “Kiddie” tax, among other items.
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