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How Will The SECURE Act Change Your Tax Planning Strategies?

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With many of the provisions in The SECURE Act, legislation signed in December 2019 that may affect how you plan for your retirement, going into effect in 2020, now is the time to consider how these new rules may impact you.

The changes might provide you and your family with tax savings opportunities. However, not all of them may be favorable, and there may be steps you could take to minimize the impact. Please contact your Ericksen Krentel tax professional or email us at communications@ericksenkrentel.com to learn how we can help you navigate these changes.

Here is a look at some of the more important items that could impact you:

Repeal of the Maximum Age for Traditional IRA Contributions

Before 2020, traditional IRA contributions were not allowed once you attained age 70½.

Starting in 2020, an individual of any age can contribute to a traditional IRA, as long as you have earned income from wages or self-employment.

Required Minimum Distribution Age Raised

Before 2020, retirement plan participants and IRA owners generally were required to begin taking required minimum distributions (RMDs) from their plan by April 1 of the year following the year they reached 70½. The 70½ requirement was first applied in the early 1960s and had not been adjusted to account for increases in life expectancy.

Individuals now must begin taking required minimum distributions from their retirement plan or IRA at 72.

Partial Elimination of Stretch IRAs

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) generally were allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries generally are required to be distributed within 10 years following the plan participant’s or IRA owner’s death. For those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to:

  • the surviving spouse of the plan participant or IRA owner;
  • a child of the plan participant or IRA owner who has not reached majority;
  • a chronically ill individual; and
  • any other individual who is not more than 10 years younger than the plan participant or IRA owner. Beneficiaries who qualify under this exception generally may still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 Education Savings Plans to Cover Registered Apprenticeships and Distributions to Repay Certain Student Loans

A Section 529 education savings plan (also known as a qualified tuition program) is a tax-exempt program established and maintained by a state or one or more eligible educational institutions (public or private).

Any person can make 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.

Before 2019, distributions were only tax-free when used to pay for qualified higher education expenses and school-related items such as books, supplies, etc.

Starting in 2020, tax-free distributions from 529 plans can be used to pay those supplies required for the designated beneficiary to participate in an apprenticeship program. Tax-free distributions (up to $10,000) also can be used to 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

Before the Tax Cuts and Jobs Act, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after December 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern TCJA 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 (“gold star children”), first responders and emergency medical workers.

The new rules enacted December 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 taxed at the larger of the parents’ or child’s rates.

Penalty-free Retirement Plan Withdrawals for Expenses Related to Birth or Adoption of a Child

Starting in 2020, plan distributions (up to $5,000) used to pay for birth or adoption-related expenses 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.

Taxable Non-Tuition Fellowship and Stipend Payments are Treated as Compensation for IRA Purposes

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes and could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable students to begin saving for retirement without delay.

Tax-Exempt Difficulty-of-Care Payments Treated as Compensation to Determine Retirement Contribution Limits

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments exempt from taxation.

Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA. For IRA contributions made after December 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

Please contact your Ericksen Krentel tax professional or email us at communications@ericksenkrentel.com to learn how we can help you navigate these changes.

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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