IRS Provides Updates for the SECURE Act | Lord Abbett
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Retirement Perspectives

The agency issues guidance for provisions including IRA contributions after age 70½ and the distribution for a qualified birth or adoption

Read time: 4 minutes

Since it was passed in March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has taken center stage in the retirement plan arena, as it provides much needed relief for individuals and businesses facing financial challenges triggered by COVID-19. As we have covered previously, the CARES Act has waived 2020 required minimum distributions (RMDs), has increased amounts for a plan loan, and has provided a new in-service distribution option—“Coronavirus Related Distributions (“CRD”).

Let’s not forget the other major legislation, passed in December 2019— Setting Every Community Up for Retirement Enhancement (SECURE) Act—that features roughly 30 provisions primarily affecting retirement and education accounts. The SECURE Act contained several provisions that went into effect on January 1, 2020. Now, the Internal Revenue Service (IRS) has published Notice 2020-68 that provides guidance on a handful of retirement provision affecting 401(k), 403(b), and governmental 457(b) plans as well as individual retirement accounts (IRAs) related to the SECURE Act and Bipartisan American Miners Act of 2019.

Below is a summary of IRS guidance published in Notice 2020-68.

IRA Contributions After Age 70½

Effective for tax year 2020, the SECURE Act repeals the maximum age for traditional IRA contributions. Previously, individuals could not make traditional IRA contributions for a taxable year if they attained age 70½ by the end of the year; SECURE repeals that age cap. Now an otherwise eligible investor can make traditional IRA contributions at any age. Furthermore, the SECURE Act increased the age at which RMDs begin, from 70½ to 72.

Somewhat surprisingly, the IRS clarifies that financial institutions do not have to accept traditional IRA contributions after age 70½. Therefore, we suggest contacting your IRA provider to ensure post age 70½ traditional IRA contributions will be accepted.

The IRS also explains how making a post age70½ deductible traditional IRA contribution can result in an otherwise tax-free Qualified Charitable Distribution (QCD) becoming taxable. The SECURE Act contains an “anti-abuse” rule that basically states that the amount of QCDs an individual seeks to exclude from taxable income is reduced by an individual’s post-age 70½ deductible traditional IRA contributions. Notably, there are two potential solutions: (1) those individuals that want to make QCDs and an IRA contribution can contribute to a Roth IRA, not a tax deductible IRA; (2) have one spouse make the tax deductible traditional IRA contribution and the other spouse make a QCD from their IRA. Read my column for more information on how the SECURE Act may affect QCDs.

Importantly, the IRS makes it clear that an individual’s post-age 70½ traditional IRA contributions may not be used to offset their RMDs. The IRS says that IRA contributions and distributions are separate transactions.

Distribution for Birth or Adoption Expenses

The SECURE Act also included a new provision, effective January 1, 2020, allowing for qualified childbirth and adoption expenses to be an in-service distributable event. A qualified birth or adoption distribution is subject to income tax, although it is exempt from the 10% early withdrawal penalty that generally applies to pre age 59½ distributions. These penalty-free withdrawals are limited to $5,000 per individual for each birth or adoption made within one year of a qualified birth or adoption. For example, a couple can take up to $10,000; in addition, in the event of twins, there can be a distribution of up to $5,000 per child. Furthermore, an employer plan may rely on reasonable representation from an employee in order to be eligible for such a distribution (unless they have knowledge to the contrary).

The IRS has now issued guidance to provide clarity on the new distribution option:

  • An eligible adoptee must be either under age 18 or disabled (physically or mentally incapable of self-support).
  • Definition of an eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.
  • Distribution must include the name, age and Taxpayer Identification Number (TIN) on the tax return for the year the distribution is made.
  • Employer sponsored retirement plans (i.e. 401(k), 403(b), etc.) are not required to offer qualified birth or adoption distribution provision. Importantly, a pre-age 59½ plan participant (plan that doesn’t offer the new distribution option) still can avoid the 10% early distribution penalty by taking a permissible plan distribution (e.g., hardship withdrawal or a distribution upon separation from service) that meets the requirements of a qualified birth or adoption distribution.
  • Qualified distribution must be made during the one-year period beginning on the date on which the baby is born, or the legal adoption of an eligible adoptee is finalized. 
  • Qualified birth or adoption funds can be recontributed to an eligible retirement plan. The “rollover” may be recontributed in a lump-sum or in parts; not adjusted for earnings, and may be made to any retirement plan to which a rollover is allowed. Funds can recontributed to the same plan the funds were distributed if: the individual received a qualified birth or adoption from that plan and is eligible to make a rollover contribution to that plans at the time of the recontribution. Unfortunately, the guidance does not offer much on how repayment timing (deadline) or the process; however, the IRS says that more information on repayments is coming.

“Difficulty of care” payments

The SECURE Act now permits previously excluded “difficulty of care” payments to be considered as compensation to determine certain account contribution limits. Therefore, foster care workers now can make nondeductible (aftertax) traditional IRA contributions and aftertax company contributions to an employer sponsor plan (i.e. 401(k)) from “difficulty of care” — even though those payments are non-taxable.

Two changes in the Bipartisan American Miners Act of 2019

Finally, Notice 2020-68  addresses two changes made by the Bipartisan American Miners Act of 2019, a law passed at the same time as the SECURE Act. The first change permits defined benefit plans to lower the minimum age for in-service withdrawals from age 62 to age 59½. The second change allows governmental 457(b) plans to offer in-service withdrawals at age 59½. Notably, the IRS clarifies that both changes are optional.

If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP IRA.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.

A governmental 457(b) deferred-compensation plan allows employees of states, political subdivisions of a state, or any agency or instrumentality of a state to invest money on a pretax or Roth aftertax basis through salary reductions. The employer deposits amounts withheld into an annuity, custodial, or a trust account, where the funds accumulate tax-deferred or potentially tax free in the case of Roth aftertax contributions until withdrawals commence, usually at retirement.

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

The Summary Plan Description (SPD) issued by plan administrators explains participants’ and beneficiaries’ rights, benefits, and responsibilities under the plan in understandable language. The SPD includes such information as: the plan’s requirements regarding eligibility; a description of benefits and when participants have a right to those benefits; procedures regarding claims for benefits and remedies for disputing denied claims; and the rights available to plan participants under the Employee Retirement Income Security Act (ERISA).

Required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

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