Setting Every Community Up for Retirement Enhancement Act of 2019
Summary of Legislation by FMP Wealth Advisers
Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on December 19, 2019. We have reviewed the new legislation and summarized in this document the items we believe to be of most impact and interest to our clients. We have not included every provision of the legislation in this document. The full text of the legislation can be found at https://www.congress.gov/bill/116th-congress/house-bill/1994/text.
Traditional IRA Contributions
Individuals with earned income may contribute to a traditional IRA regardless of their age. This repeals the law that prohibited individuals older than age 70.5 from contributing to a traditional IRA. Individuals may deduct their traditional IRA contributions at any age if they are eligible based on income. Individuals contributing to a traditional IRA must still withdraw any required minimum distribution from their IRA that is required for that year. Individuals with earned income may continue to contribute to a Roth IRA at any age if they are eligible based on income.
Required Minimum Distributions
Owners of traditional IRAs and other tax-deferred retirement accounts who were younger than age 70.5 on December 31, 2019 must begin required minimum distributions from those accounts at age 72. The new law increases the required minimum distribution start age that previously applied to all individuals. The new law does not retroactively apply to individuals who were older than 70.5 on January 1, 2020, so those individuals must continue the required minimum distribution schedule that they already began. Individuals who are older than age 72 and still working may delay the required minimum distributions from retirement plan accounts sponsored by their current employer until they are no longer working for that employer.
Inherited IRA Distributions
Beneficiaries who inherit an IRA or other qualified retirement plan account after December 31, 2019 must distribute the entire account balance within 10 years of inheriting the account. This does not apply to an IRA or other qualified retirement plan account that was inherited before January 1, 2020. Beneficiaries may distribute the account balance gradually over 10 years or fully in 1 year as long as the entire balance is distributed by the 10th year following the original owner’s death. Failure to distribute the entire balance within 10 years will result in a 50% tax penalty on the remaining balance after the 10th year. Exceptions apply to beneficiaries who are surviving spouses, disabled persons, chronically ill persons, minor children, or individuals fewer than 10 years younger than the original account owner. Beneficiaries who are surviving spouses may distribute the account balance over their remaining life expectancies or roll over the balance to their own IRA and treat the inherited assets as their own. Beneficiaries who are minor children may distribute the account balance based on their life expectancies until reaching the age of majority at which point the remaining balance must be distributed within 10 years.
Children’s Unearned Income Taxation
The net unearned income (interest, dividends, capital gains) exceeding $2,100 per year for children under age 19 and full-time students under age 24 is taxed at their parents’ marginal income tax rate. This repeals a provision of the Tax Cuts and Jobs Act of 2017 that required children’s net unearned income be taxed at the rates applicable for estates and trusts.
Qualified Birth or Adoption Distribution
Individuals may distribute up to $5,000 from their IRA or qualified retirement plan account within one year after the birth or adoption of their child without the distribution being subject to the 10% early distribution penalty that normally applies to distributions before age 59.5.
Qualified Higher Education Expenses
Beneficiaries of 529 college savings plans may receive tax-free distributions from their 529 plans to pay expenses for apprenticeship programs registered with the Department of Labor and/or to pay principal and/or interest of qualified education loans up to a lifetime limit of $10,000.
The SECURE Act contains several other provisions regarding the establishment and operation of employer-sponsored retirement savings plans. We do not believe those provisions will have a significant impact on how our clients save for retirement. Legislative changes are one reason why we consider financial planning to be a process rather than an event. We will continue to review new legislation and incorporate pertinent changes into our clients’ financial plans.