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How the SECURE Act changes your financial planning
At the end of 2019, while most of us were focused on the holidays and year-end priorities, the federal government passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It was easy to miss this news because it was tucked into a larger spending bill, and it was passed in the wake of ongoing impeachment headlines.
The new law trims at the edges of the already complicated landscape of retirement and tax planning. Rather than expecting things to look and feel easier, many people will find things are simply a little different. The SECURE Act impacts nearly all retirement savers, and some of the many details are more important than others. Here is an overview of the most significant changes as the SECURE Act starts rolling out in 2020.
Updated rules for retirement accounts
- Required minimum distribution (RMD) age increases to 72: Until now, you had to start taking required minimum distribution (RMDs) out of your retirement accounts at age 70½. These withdrawals are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. It is a little easier to think about the whole number age of 72. For some people, it also will be nice to delay the taxable income from taking money out of an IRA, especially for those with another source of income. Unfortunately, if you turned 70½ in 2019 or earlier, you must continue to take required distributions according to the old rules.
- No age limit for IRA contributions: If you work past age 70½, you can now contribute to either a Roth or a traditional IRA, subject to certain income restrictions. Before, you could only contribute to a Roth IRA after age 70½.
- Qualified charitable distribution: People over age 70½ still can make a charitable gift directly from their IRA up to $100,000 per year. The rules get more complicated, though, if you want to make a qualified charitable distribution and also make a deductible contribution to the IRA in the same year. It’s best to contact your financial adviser if you anticipate doing both.
- New parent penalty-free withdrawals: Parents can withdraw up to $5,000 from their IRA without penalty (but with potential income taxes) for birth or adoption events. Despite these changes, we still encourage you to try to plan for upcoming spending needs without tapping into your retirement reserves.
- Stretch IRAs mostly go away: The SECURE Act eliminates the use of stretch IRAs for most nonspouse beneficiaries. Previously, most retirement account beneficiaries could elect to take distributions from an inherited IRA over their lifetime, which allowed beneficiaries to preserve tax deferral for a long time. Now, most nonspouse beneficiaries will need to distribute 100% of the inherited retirement account and pay tax on the income over a maximum of 10 years.
This rule change is expected to raise some additional tax revenue to offset the expected reduction in federal income tax collections, due to increasing the RMD age to 72. The rules around inheriting a retirement account still are complicated. It is very important when planning your estate, or when inheriting, to consult with experienced professionals.
Expanded 529 college savings possibilities
- Student loans: You and your children can now use 529 college savings plan distributions to pay off up to $10,000 in student loans. However, there are some procedural details and tax ramifications to be aware of, so check with your adviser about whether this change can be applied to your situation.
- Apprenticeships: You can now use 529 plan distributions for expenses related to a qualified apprenticeship program.
Business retirement plan improvements
Even if you are not a business owner, it’s worth being aware that employers in general — and small businesses in particular — are being encouraged to help employees save for retirement.
- Higher auto-enroll percentages: If your employer auto enrolls you in their retirement plan, you are free to opt out. But most people don’t bother, which usually helps people save more. The SECURE Act now allows employers to auto enroll you in their plan and automatically increase your contributions to up to 15% of your pay after the first year (versus a prior 10% cap). Again, you can proactively remove or change your contributions to whatever you’d like. A good goal for many people over their career is to save 10%-20% of income.
- Lifetime income reporting: The SECURE Act also has established new reporting requirements for your employer. The new report is meant to make it easier for you to envision how much of a lifetime income stream you can expect in the future. This reporting requirement does not take effect until a year after the Department of Labor has established a set of rules for your employer to follow when creating your report.
- Expanded participation for long-term, part-time employees: Even if you’re a part-time employee, you may now be able to participate in your employer’s 401(k) plan. Practically speaking, it may take some time for your company to formally update their retirement plan in order for you to take advantage of the new rules.
- More MEPs: Until now, only businesses that shared a common interest could establish a multiple-employer plan (MEP). As described in this Kiplinger report, “Starting in 2021, the new law allows completely unrelated employers to participate in an [MEP] and have a ‘pooled plan provider’ administer it.” This means small businesses should now have more ways to offer cost-effective retirement plans with the savings passed on to employees who participate in the plan.
- Additional small-business incentives: The SECURE Act provides a few other tax breaks and credits to help small businesses open and operate employer-sponsored retirement plans for their employees.
- Kiddie tax changed: This modifies a law that changed with the 2017 tax cut. Going forward, a child’s unearned income, such as dividends and interest, will be taxed at their parent’s marginal tax rate, as it was before 2018. The 2017 tax law had changed this so a child’s unearned income was taxed at higher trust marginal rates. This had the adverse effect of causing some low- and middle-income children to be taxed at higher rates than their parents.
- Health insurance deduction extended: Previously, people have been allowed to deduct health expenses, to the extent they exceed 7.5% of adjusted gross income. The threshold was supposed to rise to 10%. But the SECURE Act extended the 7.5% level for 2019 and 2020. This can be helpful for families with significant care and special needs expenses.
Planning for your secure retirement
What can you expect moving forward? Not every component in the SECURE Act is effective immediately. Some may continue to come into sharper focus over time. As such, you may want to make some changes to your financial planning soon, while other steps may be required or desired over time. This is to be expected, given the number of reforms enacted in this sweeping bill.
All of these changes are a lot to remember. For more in-depth information on the changes, you can refer to this summary of the Secure Act written by Jeffrey Levine, CPA/PFS, CFP, CWS, MSA. In addition, talk with your financial and tax professionals to get more clarity on what aspects of the new law impact you and your financial planning.