If an employer (including a tax-exempt
organization) has a 401(k) plan or 403(b) plan, the maximum amount of
elective contributions that employee can make in 2020 is $19,500 ($26,000
if age 50 or over and the plan allows “catch up” contributions, which
allows an additional $6,500). For 2021, those limits are projected to
remain the same. Qualified plan limits are based on the year-to-year
increases in the third-quarter Consumer Price Index for All Urban
Consumers (CPI-U), so those amounts cannot be finalized until after the
September CPI-U values are published in October. The IRS is expected to
announce the official 2021 limits in late October or early November.
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from
traditional IRAs and qualified retirement plans for expenses related to
the birth or adoption of a child after December 31, 2019. To qualify, the
distribution must be made during the one-year period beginning on the date
the child is born or the adoption is finalized. Eligible adoptees are any
individual who has not reached age 18 or is physically or mentally
incapable of self-support. Qualified birth or adoption distributions are
included in the taxpayer’s income in the year of withdrawal but are not
subject to the 10% early withdrawal penalty or to the mandatory 20% tax
withholding and may be repaid to the retirement plan at any time. The
$5,000 distribution limit is per individual, so a married couple could
each receive $5,000.
Previously, individuals were not able to contribute to their traditional
IRAs in or after the year in which they turn 70½. The SECURE Act
eliminates this age cap.
The SECURE Act changes the age for required minimum distributions (RMDs)
from tax-qualified retirement plans and IRAs from age 70½ to age 72 for
individuals born on or after July 1, 1949. Generally, the first RMD for
individuals who were born on July 1, 1949, or later is due by April 1 of
the year after the year in which they turn 72.
The SECURE Act generally requires that designated beneficiaries of persons
who die after December 31, 2019, take inherited plan benefits over a
10-year period. Eligible designated beneficiaries (i.e., surviving
spouses, minor children of the plan participant, disabled and chronically
ill beneficiaries and beneficiaries who are less than 10 years younger
than the plan participant) are not subject to this rule. Conduit trusts
and see-through accumulation trusts are required to use the 10-year payout
rule unless the trust is for the sole benefit of a disabled or chronically
ill beneficiary. Non-see-through accumulation trusts will continue to use
the five-year payout period, which was required before the SECURE Act.
The CARES Act allows eligible individuals to withdraw up to $100,000 from
qualified retirement plans during 2020 without incurring the 10% early
distribution penalty. Individuals or their spouses, dependents or other
household members affected by COVID-19 may qualify for this relief. Such
taxable distributions can be included in gross income ratably over three
years. Taxpayers may recontribute the withdrawn amounts to a tax-qualified
plan or IRA at any time within three years after the distribution. These
repayments will be treated as a tax-free rollover and are not subject to
that year’s cap on contributions.