KEY HIGHLIGHTS YOU SHOULD KNOW
On December 20, 2019 the president signed the SECURE Act. This act primarily relates to retirement plans and other employee benefit plans. However, there were several key provisions that may affect an individual’s income tax situation. Highlights of these provisions are outlined below.
Increase Age for RMD Beginning Date: Increases age for required minimum distributions to age 72. Applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 1/2 after such date.
Fellowship and Stipend Payments – IRA eligibility: Amounts paid to the individual to aid in the pursuit of a graduate or postdoctoral study or research (such as fellowship, stipend, or other similar amount) will be treated as compensation for purposes of IRA contribution limits. Effective for tax years beginning January 1, 2020.
Repeal of Maximum Age for Traditional IRA Contributions: The prohibition on deductible contributions to a traditional IRA by an individual who has attained the age of 70 1/2 has been repealed. However, the amount of qualified charitable distribution is reduced by the excess of the allowed IRA deduction for all taxable years ending on or after age 70 1/2 over the amount of all prior year reductions. Effective for tax years beginning January 1, 2020.
Penalty-Free Withdrawals from Retirement Plans for the Birth or Adoption of a Child: Exception to the 10% early withdrawal tax for qualified birth or adoption distributions from a retirement plan made after December 31, 2019. Maximum aggregate amount that can be treated as qualified birth or adoption distributions by any individual is $5,000.
529 Plan Expansion: Provides that tax-free treatment for higher education expense also applies to certain expenses for: (1) registered apprenticeship program’s required fees, books, supplies, and equipment; and (2) qualified education loan repayments of up to $10,000. Effective for distributions made after December 31, 2018.
Modification of Minimum Required Distributions Rules for Designated Beneficiaries: Requires the entire interest to be distributed to a designated beneficiary within 10 years after the death of the employee, whether or not distributions of the employee’s interest have begun with an exception for a surviving spouse, children who have not reached the age of majority, and disabled and chronically ill beneficiaries. Surviving spouses can still elect to delay distributions until the end of the year the employee would have attained age 70 1/2 or age 72. Effective for distributions with respect to those who die after December 31, 2019.
Kiddie Tax Modifications: For taxable years beginning after December 31, 2019 certain unearned income of a child will revert back to tax at the parent’s rate rather than at the estate and trust rate. Taxpayers also have the option to elect whether to use these rates for the 2018 and 2019 tax years.
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