On Friday December 20, 2019 the President signed two
spending bills, averting a government shutdown at midnight.
The reason we are talking about it is that there were
several tax provisions included in the bills. Many if not most are as dry as
sand, but there are a few that affect retirement accounts and are worth talking
about.
Increase the Age for Minimum Required
Distributions (MRDs)
We know that we are presently required to begin
distributions from our IRAs when we reach age 70 ½. The same requirement
applies to a 401(k), unless one continues working and is not an owner.
Interestingly, Roths have no MRDs until they are inherited.
In a favorable change, the minimum age for MRDs has
been increased to 72.
Repeal the Age Limitation for IRA
Contributions
Presently you can contribute to your 401(k) or Roth
past the age of 70 ½. You cannot, however, contribute to your IRA past age 70
½.
In another favorable change, you will now be allowed
to contribute to your IRA past age 70 ½.
COMMENT: Remember that
you generally need income on which you paid social security taxes (either
employee FICA or self-employment tax) in order to contribute to a retirement
account, including an IRA. In short, this change applies if you are working
past 70 ½.
New Exception to 10% Early Distribution
Penalty
Beginning in 2020 you will be allowed to withdraw up
to $5,000 from your 401(k) or IRA within one year after the birth or adoption
of a child without incurring the early distribution penalty.
BTW, the exception applies to each spouse, so a
married couple could withdraw up to $10,000 without penalty.
And the “within one year” language means you can
withdraw in 2020 for a child born in 2019.
Remember however that the distribution will still be
subject to regular income tax. The exception applies only to the penalty.
Limit the Ability to Stretch an IRA
Stretching begins with someone dying. That someone had
a retirement account, and the account was transferred to a younger beneficiary.
Take someone in their 80s who passes away with $2
million in an IRA. They have 4 grandkids, none older than age 24. The IRA is
divided into four parts, each going to one of the grandkids. The required
distribution on the IRAs used to be based on the life expectancy of someone in
their 80s; it is now based on someone in their 20s. That is the concept of
“stretching” an IRA.
Die after December 31, 2019 and the maximum stretch
(with some exceptions, such as for a surviving spouse) is now 10 years.
Folks, Congress had to “pay” for the other breaks
somehow. Here is the somehow.
Annuity Information and Options Expanded
When you get your 401(k) statement presently, it shows
your account balance. If the statement is snazzy, you might also get
performance information over a period of years.
In the future, your 401(k) statements will provide
“lifetime income disclosure requirements.”
Great. What does that mean?
It means that the statement will show how much money
you could get if you used all the money in the 401(k) account to buy an
annuity.
The IRS is being given some time to figure out what
the above means, and then employers will have an extra year before having to
provide the infinitely-better 401(k) statements to employees and participants.
By the way …
You will never guess this, but the law change also
makes it easier for employers to offer annuities inside their 401(k) plans.
Here is the shocked face:
In case you work for a small employer who does not
offer a retirement plan, you might want to mention the enhanced tax credit for
establishing a retirement plan.
The old credit was a flat $500. It got almost no
attention, as $500 just doesn’t move the needle.
The new credit is $250 per nonhighly-compensated employee,
up to $5,000.
At $5 grand, maybe it is now worth looking at.
