As you may have heard, Congress passed a bill (here) at the end of last year that has a number of personal finance implications.
Below are the five things that many people will need to know and then below that are several items that a few people will need to know. There are lots of exceptions and provisions to many of these rules, but in an effort to keep this readable, I will (mostly) leave the detail out. When you see a word such as “generally” or “basically” below, that’s why.
Most items of interest are in the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 portion of the spending bill, but there are a few random things from elsewhere that I’ll include as well.
First, under Section 401 (Modifications to Required Minimum Distribution Rules), there is a detrimental change for many families. If you are planning to leave a retirement plan to your descendants, they will generally no longer be able to take the proceeds over their life expectancies. Instead, the maximum deferral period will be 10 years. Relevant details:
1) This does not apply to leaving the retirement plan to your spouse.
2) This does not apply to those who have already inherited a retirement plan.
3) If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, you may want to re-evaluate that decision.
4) If your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then Roth conversions for their benefit may be prudent.
Second, under Section 113 (Increase in Age for Required Beginning Date for Mandatory Distributions), there is a small, yet favorable, change. For those who are not yet 72, RMDs (Required Minimum Distributions) from retirement plans will now need to begin at age 72 rather than at age 70½.
Third, under Section 106 (Repeal of Maximum Age for Traditional IRA Contributions), there is another small, yet favorable, change. For those over age 70½ who have earned income, you can now contribute to a Traditional IRA.
Fourth, in the spending bill itself (but not the SECURE Act section we have been discussing), the change in the “kiddie tax” (basically tax on unearned income for a child under 18, or under 24 and a full-time student) that was made by the 2018 Tax Cuts and Jobs Act (TCJA) is repealed. Those earnings will again be taxed at the parent’s marginal rate as they were previously rather than at trust tax rates.
Fifth, (unrelated to this bill) beginning in 2021, the IRS is changing its life expectancy table for the calculation of RMDs. Previously, an 80-year-old using the standard table would have used a life expectancy of 18.7 years. In 2021, it will change to 20.2. The 90-year-old figure will change from 11.4 to 12.2. This means the required distribution will decrease from 5.35% to 4.95% at 80 and 8.77% to 8.20% at 90. This is not a huge change, but it is a favorable one.
The bold portions below are the bill headings, etc. the non-bold portions are our brief summary of each section, with occasional commentary.
THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (THE SECURE ACT)
TITLE I: Expanding and Preserving Retirement Savings
SEC. 101. MULTIPLE EMPLOYER PLANS; POOLED EMPLOYER PLANS. – Allows two or more unrelated employers to join a pooled employer plan.
SEC. 102. INCREASE IN 10 PERCENT CAP FOR AUTOMATIC ENROLLMENT SAFE HARBOR AFTER 1ST PLAN YEAR. – the maximum 401(k) contribution for employers using an automatic enrollment safe harbor plan is increased from 10% to 15%.
SEC. 103. RULES RELATING TO ELECTION OF SAFE HARBOR 401(k) STATUS. – simplification of safe harbor rules.
SEC. 104. INCREASE IN CREDIT LIMITATION FOR SMALL EMPLOYER PENSION PLAN STARTUP COSTS. – increases the tax credit for small businesses who set up a retirement plan.
SEC. 105. SMALL EMPLOYER AUTOMATIC ENROLLMENT CREDIT. – provides a small tax credit for employers who set up a new plan with automatic enrollment.
SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES. – grad student payments are now considered “earned income” so they can fund an IRA (or, more likely, a Roth IRA).
SEC. 107. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS. – covered above.
SEC. 108. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS THROUGH CREDIT CARDS AND OTHER SIMILAR ARRANGEMENTS. – makes plan loans less convenient (this is a good thing).
SEC. 109. PORTABILITY OF LIFETIME INCOME OPTIONS. – necessary change because of section 204 below.
SEC. 110. TREATMENT OF CUSTODIAL ACCOUNTS ON TERMINATION OF SECTION 403(b) PLANS. – allows in-kind distribution of terminated 403(b) plan balances.
SEC. 111. CLARIFICATION OF RETIREMENT INCOME ACCOUNT RULES RELATING TO CHURCH-CONTROLLED ORGANIZATIONS. – clarifies that church-controlled organizations can have retirement plans.
SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS MUST ALLOW LONG-TERM EMPLOYEES WORKING MORE THAN 500 BUT LESS THAN 1,000 HOURS PER YEAR TO PARTICIPATE. – self-explanatory.
SEC. 113. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS IN CASE OF BIRTH OF CHILD OR ADOPTION. – $5,000 limit and it can be repaid to the IRA later.
SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS. – covered above.
SEC. 115. SPECIAL RULES FOR MINIMUM FUNDING STANDARDS FOR COMMUNITY NEWSPAPER PLANS. – helps small newspapers by making the pension funding less stringent.
SEC. 116. TREATING EXCLUDED DIFFICULTY OF CARE PAYMENTS AS COMPENSATION FOR DETERMINING RETIREMENT CONTRIBUTION LIMITATIONS. – allows home healthcare workers to treat “difficulty of care” payments (which are exempt from taxation) as “earned income” so they can fund an IRA or Roth IRA.
TITLE II: Administrative Improvements
SEC. 201. PLAN ADOPTED BY FILING DUE DATE FOR YEAR MAY BE TREATED AS IN EFFECT AS OF CLOSE OF YEAR. – allows plans to be set up after the end of the year for the previous year (as SEPs have long allowed).
SEC. 202. COMBINED ANNUAL REPORT FOR GROUP OF PLANS. – allows plans that are basically the same to file consolidated Form 5500.
SEC. 203. DISCLOSURE REGARDING LIFETIME INCOME. – requires employers to show plan participants what income their plan balance is likely to generate in retirement. Most individuals have unrealistic expectations, so this is a helpful change for employees although it is (slightly) more work for employers. The DOL is to provide a model disclosure.
SEC. 204. FIDUCIARY SAFE HARBOR FOR SELECTION OF LIFETIME INCOME PROVIDER. – employer retirement plans can more easily allow annuity options. Many folks think this may open the door to sales of poor insurance products within 401(k) plans (much as 403(b) plans are chock-full of terrible investment options). Giving support to this view is how happy insurance companies were with this provision and how hard they lobbied for it.
SEC. 205. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER, LONGER SERVICE PARTICIPANTS. – protects the benefits of participants in closed retirement plans.
SEC. 206. MODIFICATION OF PBGC PREMIUMS FOR CSEC PLANS. – changes funding rules.
TITLE III: Other Benefits
SEC. 301. BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS. – one-year repeal of the SALT (State and Local Tax) limit but just for a very small group.
SEC. 302. EXPANSION OF SECTION 529 PLANS. – allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.
TITLE IV: Revenue Provisions
SEC. 401. MODIFICATION OF REQUIRED DISTRIBUTION RULES FOR DESIGNATED BENEFICIARIES. – covered above.
SEC. 402. INCREASE IN PENALTY FOR FAILURE TO FILE. – increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due.
SEC. 403. INCREASED PENALTIES FOR FAILURE TO FILE RETIREMENT PLAN RETURNS. – self-explanatory, applies to employers.
SEC. 404. INCREASE INFORMATION SHARING TO ADMINISTER EXCISE TAXES. – the IRS can share information with U.S. Customs and Border Protection to help collect the heavy vehicle use tax.
Do you have questions about how these changes might affect your situation? Call us at 970-710-0330 or email us at firstname.lastname@example.org today!
Brian Littlejohn, MBA, CFP®, CFA is a fee-only financial advisor serving clients in Glenwood Springs, CO and beyond. His firm, Sherwood Investment Management, provides investment management, retirement planning, and comprehensive financial planning to help clients organize, grow, and protect their assets. Sherwood Investment Management is completely independent, acts as a fiduciary for its clients at all times, and never accepts commissions of any kind.
Photo credit: John Salvino