Congress enacted a $1.4 trillion spending package on December 20, 2019. The package includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act overwhelmingly passed the House of Representatives in the spring of 2019 but stalled in the Senate. The SECURE Act is the most sweeping set of changes to retirement legislation in more than a decade.
Many of the provisions offer enhanced opportunities for individuals and small business owners. But there is one big drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will want to revisit their estate plans to prevent their heirs from potentially facing high tax bills.
All provisions take effect on or after January 1, 2020, unless otherwise noted.
One change requiring urgent attention is the elimination of the “Stretch IRA.” Suppose a non-spouse beneficiary inherited traditional IRA or retirement plan assets. The “Stretch IRA” let him or her spread required distributions and their taxes over their lifetimes.
The new law now requires the beneficiary to liquidate the inherited account within ten years of the account owner’s death. The beneficiary must be 10 years younger than the account owner for this rule to apply. Exceptions apply if the beneficiary is a spouse, disabled or chronically ill, or a minor child. This shorter distribution period could result in unanticipated tax bills for beneficiaries. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
Traditional IRA owners may want to also revisit how IRA dollars fit into their estate planning strategy. For example, it may make sense to consider the implications of converting traditional IRA funds to Roth IRAs. Beneficiaries inherit Roth IRAs tax free. Roth IRA conversions are taxable events. But investors who spread out a series of conversions over several years may enjoy the lower income tax rates expiring in 2026.
On the plus side, the SECURE Act includes several provisions designed to help American workers and retirees.
The SECURE Act also helps employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
Medicare premiums, deductibles, and coinsurance amounts change annually. Here’s a look at some of the costs that will apply in 2020 if you enrolled in Original Medicare Part A and Part B.
According to the Centers for Medicare & Medicaid Services (CMS), most people with Medicare who receive Social Security benefits will pay the standard monthly Part B premium of $144.60 in 2020.
You may pay less than the standard Part B premium if you meet the following conditions:
– Medicare deducts premiums from your Social Security benefits
– The cost-of-living increase in your benefit payments for 2020 will not be enough to cover the Medicare Part B increase.
People with higher incomes may pay more than the standard premium. If your 2018 federal income tax return shows a modified adjusted gross income (MAGI) above a certain amount, a higher premium will apply. You’ll pay the standard premium amount and an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium, as shown in the following table.
The following out-of-pocket costs for Original Medicare Part A and Part B apply in 2020:
The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2020 is $6,000 (or 100% of your earned income, if less), unchanged from 2019. The maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2020, but your total contributions can’t exceed these annual limits.
If you are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax deductible. For those who are covered by an employer plan, the income limits for determining the deductibility of traditional IRA contributions in 2020 have increased. If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your modified adjusted gross income (MAGI) is $65,000 or less (up from $64,000 in 2019). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your MAGI is $104,000 or less (up from $103,000 in 2019).
If you’re not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $196,000 to $206,000 (up from $193,000 to $203,000 in 2019), and eliminated if your MAGI exceeds $206,000 (up from $203,000 in 2019).
The income limits for determining how much you can contribute to a Roth IRA have also increased for 2020. If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $124,000 or less (up from $122,000 in 2019). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $196,000 or less (up from $193,000 in 2019). (Again, contributions can’t exceed 100% of your earned income.)
Most of the significant employer retirement plan limits for 2020 have also increased. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan is $19,500 in 2020 (up from $19,000 in 2019). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2020 (up from $6,000 in 2019). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)
If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($19,500 in 2020 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2020 (plus any catch-up contributions).
The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) is $13,500 in 2020 (up from $13,000 in 2019), and the catch-up limit for those age 50 or older remains at $3,000.
Note: Contributions can’t exceed 100% of your income.
The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2020 is $57,000 (up from $56,000 in 2019) plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)
Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2020 is $285,000 (up from $280,000 in 2019), and the dollar threshold for determining highly compensated employees (when 2020 is the look-back year) is $130,000 (up from $125,000 when 2019 is the look-back year).