Business Times of Edmond, Oklahoma March 2020 - Page 24

BUSINESS MATTERS JIM DENTON L edger L ines The SECURE ACT Contains a Host of Tax Changes T he SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, recently became law. This new law may affect how you are taxed and how you plan for your retirement. Many of the provisions go into effect in 2020. There are various new provisions affecting individual taxpayers and employer plan sponsors. These are summarized below: Repeal of the maximum age for traditional IRA contributions. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, if the individual has compensation such as earned income from wages or self-employment. Required minimum distribution age raised from 70½ to 72. 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 non-spousal) 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. However, for deaths of plan participants or IRA owners beginning in 2020, distributions to most non-spouse 24 March 2020 | The Business Times beneficiaries are generally required to be distributed within 10 years following the plan participant’s or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed. Spouses and disabled individuals are excepted from the new rule. Section 529 education savings plans can now pay for apprenticeships and student loan repayments. A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and generally maintained by a state. 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. For 529 plan distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions 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) can pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary. Kiddie tax changes for Gold Star children and others. There had been concern that the Tax Cuts and Jobs Act of 2017 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 (AKA “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 are no longer taxed at trust/estate rates. 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 59-1/2 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. Additionally, there are further provisions related to making specifically identified forms of non-taxable compensation eligible for the earned income required to make IRA contributions.