New Spending Package Includes Several Retirement Plan Changes: Part 2

Provisions Affecting IRAs Only

Repeal of Maximum Age for Traditional IRA Contributions

Prior to enactment of SECURE, you could not contribute to a traditional IRA in the year you turned 70½ and thereafter. (There is no such limitation for contributions to Roth IRAs.) SECURE removes that limitation, effective for taxable years beginning after December 31, 2019. So, beginning in 2020, you can contribute to a traditional IRA regardless of your age. However, other limitations continue to apply to IRA contributions, such as:

• For all IRA contributions (both traditional and Roth), there is an annual limit on how much you can contribute. For 2020, the annual limit is $6,000 per person, plus an additional $1,000 if you are age 50 or older on December 31, 2020. (In addition, contributions to a Roth cannot be made if modified adjusted gross income exceeds certain thresholds.)
• For all IRA contributions (both traditional and Roth), you cannot contribute more than your “compensation” for the year. (For a married couple, a non-working spouse can rely on the working spouse’s compensation to satisfy this requirement. This is known as a “spousal IRA.”)
• If you contribute to a traditional IRA, it is a separate question whether that contribution is deductible for federal income tax purposes.
• There’s a conforming change involving Qualified Charitable Distributions (QCDs) from an IRA (If certain requirements are met, up to $100,000 can be transferred directly from a traditional IRA to a qualified charity without being included in income. Such a distribution is called a “Qualified Charitable Distribution.”). In the case of a QCD, the amount that can be excluded from income as a QCD is decreased by cumulative net deductions allowed because of this change allowing tax deductible contributions to an IRA after age 70½. (There is no further change to the QCD statute, which means QCDs can still be implemented if the IRA owner is at least age 70½ on the date of the QCD transfer.)

Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes

Generally you cannot contribute to an IRA unless you have compensation. Under prior law, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation, even if taxed. Therefore, students who only had that type of income could not make IRA contributions.

SECURE changes that. Now, stipends and non-tuition fellowship payments will be considered compensation for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulate tax-favored retirement savings. This change is effective for taxable years beginning after December 31, 2019.

Provisions Affecting 401(k)s Only

Annuities in 401(k)s

401(k) retirement plans offer a variety of investment options. Although 401(k) plans can offer annuities, only about 10% do. This is in part because of the credit risk associated with a commercial annuity (the payor insurance company could fail). In such a case, the 401(k) sponsor company might be sued by 401(k) participants. SECURE would protect 401(k) sponsor companies from such liability, if certain conditions are met. SECURE would also make such annuities “portable,” meaning that if a participant leaves the company, the annuity could be rolled into another 401(k) or an IRA without triggering surrender charges.

Allowing Long-term Part-time Workers to Participate in 401(k) Plans

Employers may generally exclude part-time employees (those who work less than 1,000 hours) from participating in defined contribution plans. The Ways and Means Committee summary of the SECURE Act explains that the current rules can be harmful to women who are more likely to work part-time. SECURE requires employers to allow employees with 500 hours of service in three consecutive years to participate in 401(k) plans. However, the employer may elect to exclude these employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

This change would be effective for plan years beginning after December 31, 2020.