In December 2019, the Consolidated Appropriations Act of 2020 was passed by Congress. It includes the Setting Every Community Up for Retirement Act, better known as the SECURE Act, which is the most extensive retirement act since the Pension Protection Act of 2006.

Gorfine, Schiller &Gardyn’s (GSG) Tax Manager, Melissa West, answers some common questions regarding the impact of the SECURE Act on tax savings and retirement planning.

Q: What is the SECURE Act?

A: The Setting Every Community Up for Retirement (SECURE) Act includes many bipartisan reforms that have big changes to individuals and small businesses when it comes to tax and retirement planning.

Q: How does the Act affect retirement accounts?

A: One of the most notable changes is really the opportunity to save more money. Starting in 2020, the age limit for making traditional IRA contributions has been eliminated, so now, anyone of any age can put money into an IRA if they have earned income.

Under the old law, IRA contributions could no longer be made starting when you turn 70 1/2, and that rule essentially discouraged retirement savings in IRAs for people who continue to work later in life. This is a great option now, because older workers will now be able to save on a pre-tax basis, which is important considering many more people are working and living longer.

The Act also increases the age for the required minimum distributions (RMDs), from the confusing age of 70 1/2 to 72, for all retirement accounts subject to RMD, and this change applies beginning with account owners who reached 70 1/2 on or after January 1^st of this year. This is an advantage to most taxpayers who can afford to delay withdrawing money.

You can still make a qualified charitable distribution of up to $100,000 from an IRA at the age of 70 ½, and even though the RMD is 72, you can still take out that qualified charitable distribution. This is one of the most tax-effective ways to give to charity, especially if you don't itemize your tax deductions on your Schedule A.

Q:What are some of the benefits for employers from the Act?

A: The new tax law helps make it easier for employers, especially smaller ones, to offer 401(k) plans and expand access to their existing plans for more workers, such as part-time employees.

Businesses can get a tax credit to help cover the cost of starting an automatic enrollment retirement plan, and small businesses can join to setup and offer 401(k) plans through a third party with less fiduciary cost and concerns

Q:Are there any tax savings benefits as a result of the SECURE Act?

A: There are other parts of the Act that don't really relate to retirement, such as the "kiddie tax.” This tax was imposed to prevent parents from avoiding taxes by transferring large gifts back to their children. If a child earns interest, dividends, or some other unearned income, of more than $2,200, this income could be subject to tax, and before 2018, this was taxed at their parents' rate. After the Tax Cuts and Jobs Act was enacted in 2017, this unearned income was then taxed using the trust tax brackets and rates, which was a lot higher than the parents’ rates. The SECURE Act now reverts to the tax rates of the parents, for tax years beginning after 2019, potentially providing significantly lower taxes on a lot of the children's unearned income.

The Act also eliminates the notorious nonprofit parking tax, which originally created a tax for many nonprofits who provided employee fringe benefits.

Another beneficial part of the Act for taxpayers is the ability to withdraw up to $10,000 from a 529college savings plan to repay student loans without a tax or a penalty.

Q: Are there any notable aspects of the SECURE Act for beneficiaries of a retirement account?

A: The SECURE Act requires most inherited IRAs for your non-spouse beneficiary to be withdrawn and taxes paid within 10 years. This will impact millions of Americans who will inherit or leave behind a retirement account. This is basically the provision that will pay for virtually everything else. Prior to this change, the IRAs could be stretched out over a beneficiary's lifetime, so it could provide decades of tax-deferred compounding.

For example, you may have named trusts who act as beneficiaries of your retirement account. Prior to the SECURE Act, certain trusts should be stretched over the oldest beneficiary’s lifetime, possibly for decades. Now, 100% of the account will need to be withdrawn by the 10th year.

There are a lot of expansive and complicated provisions for the SECURE Act, and many of these regulations do require some tax planning strategies. Contact GSG for help determining the best approach to making your tax situation less burdensome.

Melissa is a Manager, Tax Services, at Gorfine, Schiller & Gardyn with over 15 years of public accounting experience including tax planning and the preparation of tax returns for partnerships, individuals, and tax-exempt organizations.