by Andrew Sivertsen, CFP®
In December of 2019, President Trump signed into law the SECURE Act, which stands for “Setting Every Community Up For Retirement Enhancement.”
While not as sweeping as the Tax Cuts and Jobs Act passed in December of 2017, there are some key changes to be aware of. Here’s what you need to know whether you’re a retiree, a saver, a business owner, or a parent.
Retirees: Delayed Distributions and No Contribution Cap
The SECURE Act is a mixed bag for retirees with both good news and bad news. First off, the good news! If you own an IRA, 401(k) or some other qualified retirement account, the age in which you are required to start pulling money out of your account has been raised from 70.5 to 72. This will allow you to get a little more tax-deferred growth on your investments before the IRS starts forcing you to pay taxes on your retirement account.
In addition, the bill eliminated the maximum age to contribute to Traditional IRAs. This is great news since more and more Americans are living longer and choosing to work past the traditional retirement ages. So no longer is anyone too old to save for retirement.
Retirees: No More Stretch IRAs
Now for the bad news. The bill no longer allows for stretch IRAs. This refers to when a non-spousal person inherits an IRA. Under the old law they could stretch the tax bill out over their entire life, which remains the case for spouses and some exempt beneficiaries, such as disabled or chronically ill individuals. The SECURE Act requires that the inherited assets are to be distributed within 10 years.
This is rather unfortunate for someone inheriting an IRA in their 40s/50s, who is still in the peak earnings years of their career. For example, if someone inherited a one million dollar IRA, they would have to pull out roughly $100,000 each year, which would most likely push the beneficiary into a much higher tax bracket. This is also problematic for people who planned to have their IRAs go into Trust at death. Some protection is still available for minor children, but only until they reach the age of majority. This is the year to review your estate plan, particularly reviewing how to handle non-spousal beneficiaries of Traditional IRAs/401(k)s and reviewing Trusts with your attorney.
Savers: Expanded Access to 401(k)s
If you are part-time employee, you may find that you will be eligible for your employer’s 401(k) plan. Under the old law, employees could be excluded from such plans if they didn’t work 1,000 hours in a calendar year. The new law now makes employees eligible if they’ve worked 500 hours per year for three consecutive years greatly expanding retirement access for long-term part-time employees. Employees will also find that they can access up to $100,000 of their 401(k) without penalty if their principal residence is in a federally declared disaster area and, as the owner, suffered an economic loss due to the disaster.
Business Owners: MEPs and Incentives
Many 401(k)s can be expensive and time intensive to manage, which makes them difficult for a lot of small business owners to set up. However, the new act has made it easier to access Multiple Employer Plans (MEPs). These plans allow small business owners to band together to share in the time/cost efficiencies that come along with bigger plans. In addition, there are new tax credits for business owners who set up retirement plans and those who include an auto-enrollment feature. Finally, the deadline to set up retirement plans has been pushed from 12/31 to the deadline for tax filing making it easier to retroactively set up plans.
Parents: Childbirth, Adoption, and College
Having children can be expensive and under the new law parents will find that they may be able to access up to $5,000 from their IRA penalty-free to pay for each child born/adopted. Parents will also find that they can now use 529 college savings funds to help pay off up to $10,000 of college debt. For states with a 529 tax deduction, this is a great opportunity to save some taxes while paying off student debt. Also, statistics have shown that college students will have higher GPAs if they pay for part of their college education. This is a way that parents can force their children to have some skin in the game, but then reward good performance by paying off their student debt at graduation.
There are a lot of miscellaneous changes as well. Taxpayers should consult their Planning Center advisor and/or tax specialist to see if there are other changes from which they may benefit.
Andrew Sivertsen, CFP®, is a Sr. Financial Planner in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm. Email him at: firstname.lastname@example.org.