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Alert: Setting Every Community Up for Retirement Enhancement (SECURE) Act: What You Need To Know

On December 20, 2019, President Trump signed into law the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act.  Most of the Act’s provisions became effective January 1, 2020, and impact retirement plans, 529 plan accounts, and the so-called “Kiddie Tax.”  We summarize the most important provisions below. 

Many of the Act’s changes are welcome, including the expanded list of permissible 529 plan distributions and the higher age (72) for required minimum distributions from retirement plans.  But the new requirement to withdraw inherited IRAs entirely over 10 years will significantly limit taxpayers’ ability to shelter assets from income tax within retirement accounts.

 

Your Own Traditional IRAs – RMDs and Contributions

  • If you’ve already reached age 70 ½ by December 31, 2019, then you remain subject to the prior distribution rules for your own traditional IRA, and must begin (or continue) taking annual required minimum distributions (“RMDs”) as previously required. 

There are no required distributions from your own Roth IRA at any age, and the SECURE Act does not change that.

  • If, however, you are not yet age 70 ½ on December 31, 2019, then the SECURE Act raises the age at which you must begin taking RMDs from your own traditional IRA from age 70 ½ to age 72.  By this change, Congress is acknowledging the reality of longer life expectancies and allowing traditional IRAs more time to grow tax-free. 
  • Beginning on January 1, 2020, you can now contribute to a traditional IRA regardless of your age, provided you are still working and have earned income. Previously, contributions after age 70 ½ were not tax-deductible.

 

Inherited IRAs – Traditional and Roth

  • If you’ve inherited an IRA (traditional or Roth) from an account owner who passed away prior to January 1, 2020, then there are no changes to your distribution schedule.
  • If, however, you inherit an IRA from an account owner who passes away after December 31, 2019, then in most cases you will be required to withdraw all assets from the inherited IRA within 10 years following the death of the account owner (subject to several exceptions discussed below).  Note that there are no set annual withdrawal requirements, only the requirement that all assets must be withdrawn within 10 years (i.e., you could choose to withdraw everything all at once, in year 10).  As before, any amounts you withdraw from an inherited traditional IRA will be subject to income tax on withdrawal, while any amounts you withdraw from an inherited Roth IRA will be income-tax-free on withdrawal.
  • There are several exceptions to the 10-year withdrawal requirement.  It does not apply to an IRA left to a surviving spouse, to a minor child (but only until the minor child reaches majority, at which point the 10-year requirement kicks in), to a disabled or chronically ill individual, or to a beneficiary who is not more than 10 years younger than the deceased owner (such as a sibling of the owner).  For these individuals, the prior rules about withdrawing the IRA still apply (generally, an IRA must be withdrawn over the beneficiary’s life expectancy, except that a Roth IRA left to a surviving spouse may not require any withdrawals).

 

529 Plans

The SECURE Act makes two important changes to 529 plans. 

  • First, the Act allows payments from 529 plans for registered and certified apprenticeship programs, treating them as “qualified higher education expenses.”
  • Second, the Act also allows distributions of up to $10,000 (in total, over all tax years) from a 529 plan in order to repay student loans.

Both of these changes are effective as of December 31, 2018, meaning they apply to distributions made in 2019.

 

Kiddie Tax

  • The SECURE Act repeals the changes made as part of the 2017 tax reform to the “Kiddie Tax” (the tax on the unearned income of certain children) and restores the pre-2018 rules. This means that a child’s unearned income will once again be taxed at the parents’ marginal tax rates, instead of the (potentially higher) rates applicable to trusts and estates.
  • This change is effective January 1, 2020, but taxpayers may elect to apply it retroactively to 2018 and 2019 if desired.  Therefore, if your child was subject to the Kiddie Tax in 2018 or 2019, you should evaluate with your tax professional whether it’s worthwhile to apply the change retroactively and file an amended return for 2018, if necessary.