IRA and Retirement Plan Changes in the 2019 Budget Act

By Stephanie M. Casey, CPA, Tax Senior Manager and L. Michael Gracik, Jr., CPA, Director

Overview of the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act

On Thursday, December 19, 2019, Congress passed the Further Consolidated Appropriations Act (the Act) and President Trump signed the bill into law on Friday, December 20. The Act includes the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that passed the House in May 2019.

The Act includes a number of changes, many significant, to current IRA and Retirement plan rules.

Summary

Following is a high level summary and does not convey all caveats.  Please consult your tax advisor as to how these changes would impact your specific tax planning.

STRETCH IRA

Perhaps the biggest change it the elimination of the so-called “STRETCH IRA”.  Under the rules prior to the Act, the non-spouse heirs of an IRA account, traditional or Roth, could take the required minimum distributions (RMDs) from the account over their life expectancies no matter how much younger they may have been as compared to the deceased owner of the IRA. Under the rules contained in the new Act, a non-spouse IRA beneficiary must generally withdraw all of the funds from the inherited IRA within 10 years of the death of the IRA owner.

The provisions of the Act apply to individuals who inherit an IRA after December 31, 2019.  Individuals who inherited an IRA prior to 2020 are still able to apply the old rules.

The provisions of the Act do not require IRA heirs to make annual withdrawals. The funds must be received by the end of the 10 year withdrawal period and, good news, the tax free compounding of the investment earnings can continue during that 10 year period. However, it may be more beneficial for the IRA heir to make periodic distributions in order to stay out of the higher tax brackets that may apply to a lump sum distribution at the end of the 10 year period.

The new 10 year payment period for inherited IRAs after 2019 does not apply to the following IRA beneficiaries:

• Surviving spouses,
• Disabled or chronically ill heirs,
• Minor children up to the age of majority, either 18 or 21 depending on state law. The 10 year withdrawal period starts to apply on that date,
• A child that is still in school does not have to start the 10 year payout period until age 26, provided they are still in school. The 10 year withdrawal period begins at the earlier of age 26 or the date that the child is no longer in  school

These new rules make it important to consider naming your surviving spouse as the beneficiary of your IRA and allocating other assets to non-spouse heirs.

REQUIRED MINIMUM DISTRIBUTION (RMD) AGE

Under the Act, individuals do not have to begin taking RMDs until the year that they turn 72. This is an increase from age 70 ½ under the old law. This applies to RMDs from either IRAs or 401(k) plans. You can extend your RMD even more for 401(k) plans if you continue to work past the RMD age and do not own 5 percent of the company. RMDs are delayed until you stop working.

QUALIFIED CHARITABLE DISTRIBUTION (QCD)

Although the RMD age was increased by the Act, no change was made to the age where taxpayers can make direct contributions to a charity from their IRA and exclude the donated amount from their gross income. That age remains at 70 ½.

PENALTY WITHDRAWALS UPON BIRTH OF A CHILD OR ADOPTION

After 2019, individuals can make a penalty free withdrawal from their IRA within a year of the birth or adoption of a child of up to 5,000 dollars for each spouse.

For adoptions, the adoptee generally must be 18 years old or younger or is physically or mentally incapable of self-support.  The adoption of a spouse’s child does not qualify and any withdrawal from an IRA would be subject to penalty.

Taxpayers can also put the money back into the retirement account at a later date. Recontributed amounts are treated as a rollover and not included in taxable income nor part of the annual contributions limit.

AGE RESTRICTION ON IRA CONTRIBUTIONS

The Act repeals the rule that prohibited contributions into traditional IRAs for taxpayers age 70 ½ or older.  Individuals that work into their 70s may now make contributions into traditional IRAs. This provision will also apply to allow non-working spouses to make contributions into traditional IRAs.

However, under the Act, deductible IRA contributions made after age 70 ½ can have an adverse impact on an individual’s ability to make QCDs directly from his/her IRA account.

Note:  There was never an age restriction on contributions to a ROTH IRA.

NEW RULES FOR PART-TIME EMPLOYEE PARTICIPATION IN 401(k) PLANS

Prior to the Act, part-time employees had to work at least 1,000 hours per year to be eligible to participate in a 401(k) plan. The Act allows part-time employees over the age of 21 that have worked at least 500 hours per year for 3 consecutive years the ability to participate in the employer’s 401(k) plan.

Note:  Employers may have to amend their plan documents to provide for these new participation rules.

SMALL BUSINESS TAX CREDIT FOR RETIREMENT PLAN START-UP COSTS

The Act increases the tax credit for 50 percent of the costs to set-up a retirement plan for an eligible small business to 5,000 dollars. Under the law prior to the Act the maximum credit was 500 dollars. There is also a new 500 dollar credit for start-up costs available to plans that include the automatic enrollment feature. This credit is available for 3 years and is in addition to the 5,000 dollar credit for set-up costs.

Our team will continue to monitor the tax extenders deal and keep you informed of additional updates or changes. If you have questions on this or other tax matters, please contact us. We are here to help. | 804.747.0000

Additional Tax Resources

• Individual tax provisions extended by the Taxpayer Certainty and Disaster Relief Act
• Tax Extenders Deal Renewing Expired Tax Breaks Through 2020 Approved
• How taxpayers can save with a Qualified Charitable Distribution
• Tax Residency of Estates and Trusts
• New IRS Form to Report Nonemployee Compensation
• IRS Tax Withholding Estimator: Three Shortcomings to Be Aware Of