SECURE Act Changes

As many of you have heard the SECURE Act has been passed by Congress, but what does that mean for individuals and small business? Here are a few of the key changes that occurred with the SECURE Act.

Kiddie Tax changes- Under the Tax Cuts and Jobs Act of 2017 the Kiddie tax had been changed to be taxed at the higher, more compressed tax rates of trusts which the top tax rate starts at $13,000. The SECURE Act has reverted the Kiddie tax to being taxed at the parent’s rate starting in 2020 and it will allow prior filed 2018 and 2019 tax returns to use these new, lower tax rates as well.

401(k), IRA, and other qualified retirement plan distribution rules changes- In the past once an individual reaches the age of 70 ½ they are required to start taking their minimum required distributions or face a 50% penalty. Under the SECURE Act this age has been moved to age 72. Another change with the distribution rules under the SECURE Act is when there is an inherited retirement account. It used to be that once an individual had inherited a IRA they would then take distributions over their life. Under the new rules this distribution period has been shorted to only 10 years. This change will make Roth conversions and use of Roth IRAs and Backdoor Roth strategies more appealing. The new Act also gives individuals the ability to make an early withdrawal of up to $5,000 penalty free in the year they adopt or have birth of a child.

Another area the SECURE Act has impacted IRAs is that individuals can now continue contributing to IRAs at any age, removing the previous age limit.

The new laws have changed things for the better for employers. Retirement plans can now hold products which offer predictable income streams in retirement such as annuities or life insurance. Also, if an employee switches jobs these investments can be directly transferred so there is no need to worry about surrender fees or penalties.

Small Business Credits have increased greatly for starting a new retirement plan. The SECURE Act allows three years of credits to employers for the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. There is also a new 3 year tax credit of up to $500 for small businesses (100 employees or less) that create a SIMPLE IRA or 401(k) with automatic enrollment