by John Mlynczyk and Rich Nellis


Congress recently passed, and the President signed into law, the Setting Every Community Up for

Retirement Enhancement Act (SECURE Act), landmark legislation that may affect how you plan for your

retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how

these new rules may affect your tax and retirement-planning situation.


Here is a look at some of the more important elements of the SECURE Act that have an impact on

individuals. The changes in the law might provide you and your family with tax-savings opportunities.

However, not all of the changes are favorable, and there may be steps you could take to minimize their

impact. Please give me a call if you would like to discuss these matters.


Repeal of the maximum age for traditional IRA contributions. Before 2020, traditional IRA contributions

were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an

individual of any age to make contributions to a traditional IRA, as long as the individual has

compensation, which generally means earned income from wages or self-employment.


Required minimum distribution age raised from 70½ to 72. Before 2020, retirement plan participants and

IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their

plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first

applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to

account for increases in life expectancy.


For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that

date, the age at which individuals must begin taking distributions from their retirement plan or IRA is

increased from 70½ to 72.


Partial elimination of stretch IRAs. For deaths of plan participants or IRA owners occurring before 2020,

beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral

advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the

IRA context, this is sometimes referred to as a “stretch IRA”).


However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in

collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are

generally required to be distributed within ten years following the plan participant’s or IRA owner’s death

(10-year rule). So, for those beneficiaries, the “stretching” strategy is no longer allowed.


Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan

participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority;

(3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than

the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally

still take their distributions over their life expectancy (as allowed under the rules in effect for deaths

occurring before 2020).


Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions

to repay certain student loans. A Section 529 education savings plan (a 529 plan, also known as a

qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more

eligible educational institutions (public or private). Any person can make nondeductible cash

contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions

accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated

beneficiary’s qualified higher education expenses.


Before 2019, qualified higher education expenses didn’t include the expenses of registered

apprenticeships or student loan repayments.


But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions

from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated

beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000)

are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or

a sibling of the designated beneficiary.


Kiddie tax changes. In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which

made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children.

Before enactment of the TCJA, the net unearned income of a child was taxed at the parents’ tax rates if

the parents’ tax rates were higher than the tax rates of the child.


Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to

net unearned income is taxed according to the brackets applicable to trusts and estates. Children to

whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption

amount under the alternative minimum tax (AMT) rules.


There had been concern that the TCJA changes unfairly increased the tax on certain children, including

those who were receiving government payments (i.e., unearned income) because they were survivors of

deceased military personnel (“gold star children”), first responders, and emergency medical workers.


The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA.

So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of

children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in

2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie

tax rules apply and who have net unearned income.


Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception

applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is

subject to a 10% early withdrawal penalty on the amount includible in income.


Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or

adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married

couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.


Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral

students were not treated as compensation for IRA contribution purposes, and so could not be used as

the basis for making IRA contributions.


Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and

stipend payments to be treated as compensation for IRA contribution purposes. This change will enable

students receiving those payments to begin saving for retirement without delay.


Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement

contribution limits. Many home healthcare workers do not have taxable income because their only

compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those

workers did not have taxable income, they were not able to save for retirement in a qualified retirement

plan or IRA.


For contributions made to IRAs after Dec. 20, 2019 (and retroactively starting in 2016 for contributions

made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to

a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as

compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.


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