top of page
  • Writer's pictureChristopher D. Munchhof

The Secure Act: Tax Changes Now In Effect

After a massive tax overhaul came into effect for 2018 taxes, it's hard to believe that more tax changes would be here so soon, but here we are! The President signed the Secure Act into law just before Christmas on December 20, 2019. The main focus of the law is to help people save for retirement. While much of the law is meant to encourage businesses to establish or enhance retirement plans through administrative rule changes and tax credits, there are several provisions that may affect you and your taxes directly.

New Required Minimum Distribution Age

When you save in a tax-deferred retirement account like an IRA or 401(k), the government eventually wants you to pay tax on that money. Therefore, they require you to make minimum withdrawals from your account calculated using a formula based on your age and the value of your account. Everything you withdraw counts towards your taxable income. Prior to the Secure Act, you would be required to make your first withdrawal in the year you reach age 70 ½. Under the new rules, your required minimum distribution doesn’t take place until the year you reach age 72. This allows savers to keep more of their assets invested for longer and makes sense given our lengthening life expectancy.

If you turned 70 ½ in 2019, you’ll still, unfortunately, be required to start your required minimum distributions (RMD) in the year 2019. The first RMD you take after reaching the required age may be deferred until April 1st of the year following the year you reach the required age. Therefore if you reached age 70 ½ in 2019, the latest you may take your first RMD is April 1, 2020. If you delayed your initial RMD until 2020, you’ll end up taking two RMD’s in 2020, one RMD for 2019 and another for 2020. The 2020 RMD must be taken by December 31, 2020.

If you turned age 70 in the second half of 2019 or later, the new age 72 rule applies to you. This means that anyone who did not reach age 70 ½ by 2019, will not have an RMD until 2021 or later.

No Maximum Age for IRA Contributions

Prior to the Secure Act, individuals had to stop making contributions to their IRA accounts the year they reached 70 1/2 years old. The new law allows for IRA contributions to be made at any age as long as the individual has earned income. This change reflects the fact that more people are working later in life.

For 2019 and 2020, the maximum IRA contribution is the lesser of $6,000 or the taxpayer's earned income. You may contribute up to an extra $1,000 per year if you are age 50 or older.

The elimination of the maximum age for IRA contributions may help certain taxpayers effectively undo a portion of their required minimum distributions by depositing money into an IRA. However, this would only work for individuals who still have earned income or receive taxable alimony.

Penalty-Free Withdrawal For Birth of Child

The new law also provides the ability for parents to withdraw up to $5,000 from a retirement account for the birth or adoption of a new child. The withdrawal would still be taxed as income, but the 10% penalty for early withdrawals would be waived. The idea behind this exemption is that increasing the flexibility of retirement accounts may encourage more people to contribute.

The distribution would have to be taken within 12 months of the child's birth or finalized adoption and anyone claiming the exemption must provide the child's name, age, and tax identification number.

The withdrawal can be repaid to the retirement plan without counting towards annual contribution limits, however, repayment is not required. The exemption can be used on withdrawals taken after December 31, 2019.

Another 529 Plan Expansion

After the Tax Cuts and Jobs Act, the Secure Act added additional flexibility to the use of 529 Plan funds. In addition to using 529 funds for college expenses and K-12 tuition, funds from a 529 plan can now be used to fund participation in an eligible apprenticeship program. Qualified expenses include fees, books, supplies and equipment. The apprenticeship program must be registered and certified with the Secretary of Labor to be eligible.

Under the Secure Act, 529 plan funds may also be used to pay a portion of student loan debt. The law allows for up to $10,000 of student loan debt per individual to be paid with 529 plan funds. The student loan debt must belong to the beneficiary of the 529 plan or any of the beneficiary’s siblings. The $10,000 amount is a lifetime limit, not an annual one. The $10,000 in student loan payments may be spread over several years. If 529 plan funds were used to pay down student loan debt, the taxpayer may not use the deduction for student loan interest that year.

Change To Inherited IRA Distributions (Elimination of “Stretch IRA”)

Prior to the Secure Act, beneficiaries of IRA’s and other Retirement accounts had a few options when it came to withdrawing the money. One of those options was to spread out distributions over the beneficiary's lifetime based on IRS tables. The ability to spread out IRA distributions over many years would have two benefits for the beneficiary. First, the distributions would be smaller and therefore less likely to create huge tax bills. Also, the smaller distributions would allow more of the inherited funds to remain invested in the IRA growing tax-deferred providing income to the beneficiary for a longer period.

The Secure Act requires inherited retirement accounts to be depleted within 10 years following the original account owner’s death. It’s up to the beneficiary to determine if they want to withdraw the entire account at once or spread it over the 10 year period.

There are a few exceptions to the 10-year rule. A surviving spouse, disabled beneficiary, and beneficiaries that are not more than 10 years younger than the account owner may still elect to spread the account distributions over their lifetime. Additionally, a minor child beneficiary may spread out distributions until they reach the age of majority at which time the 10-year rule would begin. Assuming the age of majority is 18, this would give a minor child until age 28 to deplete the account.

The new rules apply to retirement accounts inherited after December 31st, 2019. This means retirement accounts inherited prior to 2020 will continue to follow the old rules moving forward.

Additional Income Sources Eligible For IRA Contributions

Typically, only earned income or taxable alimony received counts as eligible income for making contributions to IRA accounts. As part of the Secure Act, fellowship and stipend payments which have been classified as unearned income will now count as eligible income for making contributions to an IRA. Additionally, tax-exempt pay for home healthcare workers (known as difficulty of care payments) can now be counted as income for IRA contribution purposes.

Kiddie Tax Reversion

The so-called “Kiddie Tax” is designed to prevent parents from holding investments in their children’s’ names in order to avoid taxes. Prior to the Tax Cuts and Jobs Act, any unearned income above $2,200 reported on a dependents tax return would be taxed at the parent's highest marginal tax rate thus eliminating any tax incentive for parents to hold any substantial amount of investments in their children’s’ names. Calculating the “Kiddie Tax” was fairly complicated because it required the parent's income to calculate the tax on the dependent’s return.

The Tax Cuts and Jobs Act sought to simplify the calculation of the “Kiddie Tax” by applying the tax rates used for trusts to figure the amount of “Kiddie Tax” to pay. Unfortunately, trusts are taxed at much higher rates than individuals and this had the unfortunate result of requiring some dependents to pay substantially higher taxes. Particularly students who received certain taxable scholarships have to report the taxable portions of their scholarships as unearned income subject to the “Kiddie Tax” rules.

As part of the Secure Act, the “Kiddie Tax” changes released under the Tax Cuts and Jobs act were retroactively repealed. This means that anyone who paid the “Kiddie Tax” at the higher trust tax rates on their 2018 tax return may amend their 2018 return for a reduced tax bill.



bottom of page