By Claudia Allen
The SECURE Act is good news for many who seek to maximize retirement savings. Signed into law on December 23, 2019, its provisions generally favor tax deferred savings, recognizing changes in the workforce such as part-time employment and continuing work into what was traditionally retirement age. Some highlights:
- A significant provision raises the age at which Required Minimum Distributions (RMDs) must begin from 70 ½ to 72. This means that individuals who have not yet reached age 70 ½ in 2019 will not be required to take a distribution from the accounts they maintain in qualified retirement plans and IRAs until the year they turn 72. The new law does not change the RMD exception for those who continue to work after RMD age – they will still be able to postpone their RMD from plans sponsored by their employers if they do not own more than 5% of the business.
- Recognizing that individuals work longer, the maximum age for making traditional IRA contributions, which used to be 70 ½, has been eliminated.
- Effective January 1, 2021, employers will be able to join with other companies to set up a multiple-employer retirement plan (“MEPs”), lessening their expenses. The Act also provides relief from the “one bad apple” rule that would taint the entire plan if one of the employers failed to comply with qualification obligations. New tax credits will be available for small employers who set up new 401(k) plans or SIMPLE IRAs with automatic enrollment features. This credit is available in addition to the current plan start-up credit.
- Plans with Safe Harbor features will become more flexible. The notice requirement has been eliminated for employers that elect to make a 3% nonelective contribution. (Not so for those satisfying the Safe Harbor through a matching contribution.)
- Employers can decide to adopt a Safe Harbor amendment to their existing plan retroactively until 30 days before the end of a Plan Year and even later with an increased contribution. Those without a qualified plan now have until the due date for the tax return to adopt a profit sharing or pension (but not a 401(k)) plan for that year.
- Non-spouse beneficiaries of IRAs and Profit Sharing plans must now be paid out within 10 years of the owner’s death. (Previously, these beneficiaries could be paid out over their actuarial life expectancy.) While this “stretch” period has been shortened, beneficiaries can still accumulate earnings for ten years.
- Part-time workers will now be eligible to participate in their employer’s 401(k) plan if they work over 500 hours in each of three consecutive years. Employers will not be required to make nonelective contributions for these part-timers.
- In-service distributions of up to $5,000 may be taken to pay expenses of the birth or adoption of a child – with repayment permitted at a later date.
The Internal Revenue Service has announced that it will allow a bit more to be deposited into existing plans in 2020.
- Contribution limits for salary deferrals in into 401(k), 403(b) and 457(b) plans will increase from $19,000 to $19,500. Catch-up contributions (allowing participants age 50 or over to contribute an additional amount to 401(k) and 403(b) plans and Governmental 457(b) plans) increase to $6,500.
- If you contribute to a traditional IRA, the amount is limited and the deductibility of your contribution is determined by your income and whether you are an active participant in an employer’s qualified plan. The deduction limit is $6,000 in 2020 with another $1,000 for those 50 or over.
- Contributions to Roth IRA – IRAs that are funded with after-tax dollars, but are potentially distributable tax-free –are limited to those whose compensation is under certain limits. For singles, the limit is a phased out when income is between $124,000 and $139,000. For those married filing jointly, the phase out applies to income between $196,000 and $206,000.
- Saver’s Credit limits have increased depending on the individual’s filing status: the credit is available if income is under $65,000 (married filing jointly), under $48,750 (head of household) or under $32,500 (single or separate filer).
- Employers will be interested in knowing that the overall contribution limit to “defined contribution” plans –generally profit sharing plans or ESOPs – is increased to $57,000 from $56,000. Also, the compensation cap on the amount that can be taken into consideration when making plan contributions will increase to $285,000. Employees will be considered “Highly Compensated” for nondiscrimination purposes when they make $130,000 or more.
These are just highlights; for more detailed information, or help with how these rules apply, please contact Claudia Allen at email@example.com.
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