The new year brings with it some important changes to retirement savings laws, which may impact your freelance taxes and retirement accounts. First, the Internal Revenue Service (IRS) has increased the contribution limits for 401(k)s and other retirement plans as follows starting January 1, 2020:

• Maximum employee contribution rises $500 – from $19,000 to $19,500
• Combined employer and employee contribution rises $1,000 to $57,000
• Employee catch-up contribution for participants ages 50+ will rises $500 to $6,500
• Combined employer and employee contribution for 50 years and older rises $1,500 to $63,500
• Annual compensation limit for calculating contributions increases $5,000 to $285,000
• Highly Compensated Employee (HCE) limit increases $5,000 to $130,000

In addition, on December 20 the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law. It may have a positive impact on your freelance retirement savings in 2020 and beyond. The Act represents the most significant changes to retirement legislation since the Pension Protection Act of 2006.

With so many Americans struggling to save and invest for retirement, the SECURE Act was designed to make it easier for businesses to offer retirement savings plans, for individuals to save for retirement and for retirees to access their savings through the following changes:

• Small businesses offering their employees 401(k) plans may be eligible for tax credits and protections on collective Multiple Employer Plans. In essence, the Act would allow small employers to collaborate to set up and offer 401(k) plans with less liability and less cost than before.
  
• A new $500 tax credit is available to businesses to offset the start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit mentioned above. The credit is also available to small businesses that convert an existing retirement plan to an auto-enrollment plan.
  
• 401(k) plan sponsors can now offer in-plan annuities inside of a 401(k) by alleviating concerns about the liability related to picking an annuity provider for the plan.
  
• Retirement benefits can be offered by employers to long-term, part-time employees who have worked at least 500 hours per year for at least three consecutive years. The part-time employee must also be 21 years old by the end of the three-year period. The new rule doesn't apply to collectively bargained employees.
  
• The SECURE Act requires 401(k) plan administrators to provide annual "lifetime income disclosure statements" to plan participants showing how much money they could get each month if their total 401(k) account balance were used to purchase an annuity. These new disclosure statements aren't required until one year after the IRS issues interim final rules, creates a model disclosure statement, or releases assumptions that plan administrators can use to convert account balances into annuity equivalents — whichever is latest.
  
• Penalty-free withdrawals of up to $5,000 from retirement plans for qualified expenses associated the birth or adoption of a child are now allowed. This means that if you have a 401(k), IRA or other retirement account, the new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. Keep in mind that you will still owe income tax on the distribution unless you repay the funds. If you're married, your spouse can also withdraw $5,000 from their own account, penalty-free.
  
• Penalty-free withdrawals of up to $10,000 can be made from 529 education-savings plans for the repayment of certain student loans.
  
• If you are a student, amounts paid to you to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend, or similar amount) are treated as compensation for purposes of making IRA contributions. Similarly, if you are a foster-care provider, "difficulty of care" payments will also be considered compensation under the new retirement law when it comes to 401(k) and IRA contribution requirements.
  
• The maximum age limit on retirement contributions (formerly capped at age 70½) is eliminated.  The required minimum distribution (RMD) age increases to 72 from 70½. Together, these two provisions will delay both the tax burden of withdrawals and slow the drawdown rate on savings.

Some other significant changes to be aware of with these new laws in regard to being a beneficiary of someone else’s retirement plan through an inheritance:

• If you know that you are going to be the beneficiary of an inherited retirement plan such as a 401(k)s, traditional IRA, or Roth IRA, beware the SECURE Act has made some significant changes to how you can spread the distributions of these plans. Instead of being able to draw from them over your own life expectancy, you must now take distributions over a 10-year period. This may impact your taxable income, especially if you are in your prime earning years.
  
• Another important change the SECURE Act ushers in is a revision to the law in the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans.

Another key part of your freelance retirement income in the future are Social Security payments — so don’t forget to make estimated tax payments including Social Security and Medicare allocations throughout the year. For 2020, Social Security and Medicare remain unchanged at 15.30% for self-employed individuals (7.65% for individuals). The Social Security taxable income threshold increases for 2020 from $132,900 to $137,700. There is no maximum threshold for Medicare taxes and, if you make in excess of $200,000 ($250,000 for those married filing jointly), you will pay a 0.9% Medicare surtax.

If you are a freelancer who hasn’t set up a retirement savings plan the beginning of the year is an ideal time to do it. Given that your retirement needs will likely increase over time due to longer life expectancies and increases in the rate of inflation and cost of living, contributing as much as possible to a qualified retirement account is crucial.

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union* and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a new blog, how-to articles, and a comprehensive freelance tax guide.

*Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.