On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 into law. The legislation includes the SECURE Act (“Setting Every Community Up for Retirement Enhancement”), which is likely to impact most taxpayers.
The SECURE Act includes the following provisions, which became effective January 1, 2020:
- Required minimum distribution (RMD) – RMD from a traditional IRA can begin on April 1 of the year after the participant reaches age 72, instead of age 70 ½.
- Age limitation for IRA contributions – There is no longer an age restriction to contribute to a traditional IRA. Prior law prohibited IRA contributions after age 70 ½.
- Non-spousal inherited IRAs – Beneficiaries of a non-spousal inherited IRA must withdraw funds over a 10-year period, rather than their lifetime. This prohibits the stretching of distributions, and the deferral of tax, to occur over a longer period of time.
- Penalty-free withdrawals from plans – Under current law, there is a 10 percent penalty on early distributions from an IRA (before age 59 ½). The SECURE Act allows a participant to withdraw up to $5,000 in the case of a qualified birth or adoption, with some exceptions.
- Part-time workers’ 401(k) eligibility – Generally, employers may exclude part-time workers (less than 1,000 hours) from their defined contribution plans. The SECURE Act requires employers to include part-time employees with at least 500 hours of service in three consecutive years to participate.
- Employer tax credits – Small employers with fewer than 100 employees receiving $5,000 or more of compensation per year may be eligible for a tax credit for establishing a retirement plan. The maximum credit is $5,000 for up to three years. A $500 employer tax credit is also available for using automatic participant enrollment.
The Act also includes some income tax provisions in areas other than retirement plans:
- 529 plan expansion – Qualified expenses now include costs associated with registered apprenticeships and up to $10,000 in student loan repayments (principal and interest).
- Reinstatement of “Kiddie Tax” – The 2017 TCJA altered the taxation of children’s unearned income. Prior to this legislation, this income was taxed at the child’s parents’ marginal tax rate. The TCJA made that income subject to trust tax rates instead. This change typically created a higher tax bill for children with significant unearned income. Beginning in 2020, the Kiddie Tax is once again being computed using the child’s parents’ marginal tax rate. Taxpayers can also elect to apply the new rules to the 2018 and 2019 tax years by filing amended returns.
The SECURE Act includes many changes that affect employers and employees. Please contact Kreischer Miller’s Tax Strategies group to learn more about how the Act may impact you.
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