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The  CARES Act includes provisions that allow individuals to take early retirement plan distributions within certain rules.  These changes include provisions for people with COVID-19 or who have family members with the illness. It also includes those who experience adverse financial consequences as a result of being quarantined,  laid off, furloughed or having work hours reduced because of the illness.

The recently passed CARES Act includes provisions that allow individuals to take early retirement plan distributions of up to $100,000 from their retirement accounts without being subjected to the 10% penalty and gives them three years to pay the taxes on the distribution or return the funds to their account. 

Also included, is the provision allowing individuals required to take Required Minimum Distributions (RMD’s) to elect to return the funds they have taken during 2020 or to not take their RMD for the year. In order to take these early distributions, or to return RMD’s taken prior to January 31, 2020, an individual must be able to designate them as a Coronavirus-Related Distribution. To establish these items as Coronavirus-Related Distributions the individual must fall into one of the following categories:

It is important to note that these items only apply to early distributions and to RMD’s taken prior to January 31, 2020 for the current year that would therefore not fall in the normal 60-day window an individual would have to return distributions without repercussions.

If you have taken an RMD after January 31, 2020 you can simply write a check within 60 days of receiving the distribution and return those funds to your account without having to meet any of these requirements.

If you have not yet taken any RMD and do not wish to take the funds for the current year, there is nothing you will need to do to defer that payment. For any individuals that deferred their 2019 payment because they reached 70 ½ in 2019 and would have been required to take two distributions in 2020, this requirement is also eliminated.

Additionally, for those who typically use a portion of their RMD to support charitable organizations, these funds can still be withdrawn for those purposes allowing individuals to use pre-tax dollars to support the organizations that mean the most to them.

Americans share at least one dilemma when it comes to retirement planning. From the worker to the employer to the policymaker, everyone is living longer. On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, receiving almost unanimous bipartisan support, offers the most significant shift to retirement plans and opportunities since the Pension Protection Act of 2006. In the bill, there are over 25 changes and provisions that expressly aim to encourage retirement savings among all workers. This bill, along with the Senate’s Retirement Enhancement Securities Act (RESA), addresses the apparent need for a worker’s wealth to run (and finish) the race with them. These documents may face modification before being signed into law, but one thing is clear: change is coming. Below we have prepared a synopsis of the changes that present the most opportunity. 

Pooled Employer Plans

Many businesses are without affiliation and are too small to offer a savings retirement plan on their own. The new bill will reduce fiduciary responsibility and lower the overall costs associated with providing 401(k) plans by expanding the option to run multi-employer plans through a plan administrator. Sec. 106 goes a step further to incentivize smaller businesses to offer a retirement savings plan. The Act introduces a $500 tax credit for automatic enrollment into their retirement plan.

Annuities

The SECURE Act eases the liability concern over offering annuities. Most businesses have shied away from annuity providers because of their inherent risk. Section 204 updates safe harbor provisions, thus opening the door for employees to take advantage of converting their 401(k) balances to a pension-like payout plan. Another provision of the bill will allow workers to transfer a defunct annuity contract to an IRA while maintaining contributions. The only criticism on this update is the broad guidelines surrounding annuity providers. Some fear that ambiguity will lead to insurance companies offering shoddy plans.

Required Minimum Distribution (RMD) Age

The current law requires that most individuals begin withdrawing a minimum distribution from their retirement savings at the age of 70.5. Six-months-past-70 has invited an unnecessary amount of confusion since its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the age requirement will be raised even higher to 75.

IRA Contributions

One of the most confounding retirement rules is the age limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals the age limitation for traditional IRA contributions.

Benefit to Parents

Section 113 removes the 10 percent penalty tax from qualified early retirement plan withdrawals. Parents will be able to take an aggregate amount of $5,000 within one year of the adoption or birth of a child, penalty free. Section 302 expands section 529 plans by allowing withdrawals of as much as $10,000 for repayments of some student loans.

Stretch Provisions

Currently, beneficiaries of inherited retirement plans like 401(k), traditional IRAs, and Roth IRAs can spread the distributions until their dying breath. The new revenue provisions (Section 401) changes the rules, requiring most beneficiaries to distribute the account over a 10-year period and pay any taxes due. The tax-generating change will accelerate the depletion of many inherited accounts but will not affect surviving spouses and minor children.  

Disclosures

Another administrative improvement provided in the Act requires employers to provide a lifetime income disclosure once every 12 months. The disclosures are meant to show the amount of monthly payments the participant or beneficiary would receive based on the total accrued benefit. 

Kiddie Tax

Under the current law, the unearned income of children would be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie tax” measures that were added by the 2017 Tax Act. The new provision states that unearned income of children would not be taxed at trust rates. Taxpayers can retroactively elect to not pay the taxes. The bill benefits many Americans, including families of deceased active-duty service members, survivors of first responders, children who receive certain tribal payments, and college students receiving scholarships.

Other changes proposed in bill include increased penalties for failures to file and the portability of lifetime income options. The SECURE Act is as likely to pass as it is to undergo slight modifications. We will keep an eye on the state of the bill and keep you abreast of its status. In the meantime, our professionals are standing by to answer your questions and address your concerns.

The IRS recently announced the 2018 cost-of-living adjustments for various retirement plan dollar limits.

The indexed amounts, and other commonly used limits, are listed below:

2018 2017 2016

IRAs

IRA Contribution Limit $5,500 $5,500 $5,500
IRA Catch-Up Contributions 1,000 1,000 1,000

IRA AGI Deduction Phase-out Starting at

Joint Return 101,000 99,000 98,000
Single or Head of Household 63,000 62,000 61,000

SEP

SEP Minimum Compensation 600 600 600
SEP Maximum Contribution 55,000 54,000 53,000
SEP Maximum Compensation 275,000 270,000 265,000

SIMPLE Plans

SIMPLE Maximum Contributions 12,500 12,500 12,500
Catch-up Contributions 3,000 3,000 3,000

401(k), 403(b), Profit-Sharing Plans, etc.

Annual Compensation 275,000 270,000 265,000
Elective Deferrals 18,500 18,000 18,000
Catch-up Contributions 6,000 6,000 6,000
Defined Contribution Limits 55,000 54,000 53,000
ESOP Limits

1,105,000

220,000

1,080,000

215,000

1,070,000

210,000

Other

HCE Threshold 120,000 120,000 120,000
Defined Benefit Limits 220,000 215,000 210,000
Key Employee 175,000 175,000 170,000
457 Elective Deferrals 18,500 18,000 18,000
Control Employee (board member or officer) 110,000 105,000 105,000
Control Employee (compensation-based) 220,000 215,000 215,000
Taxable Wage Base 128,400 127,200 118,500