The Setting Every Community Up for Retirement Enhancement, or SECURE Act, was passed at the end of last year, meaning most provisions are effective January 1, 2020. The purpose of the act is to help Americans better prepare for retirement, but provisions to assist with paying for college and growing a family have also been added. The most impactful changes are listed below:
- RMDs begin at age 72, up from 70.5.
- Removal of IRA contribution age limit.
- Stretch IRA is no more. New 10-year rule for distributions.
- Qualified 529 distributions now include apprenticeships and student loan payments.
- Penalty-free withdrawal for birth or adoption of child.
- Expanded tax credits to help small businesses set up retirement plans.
The age for starting Required Minimum Distributions (RMDs) from qualified retirement accounts has been increased from age 70.5 to age 72. That means if you were born after June 30, 1949 you wait until the year you turn 72 to begin taking RMDs. Although delaying withdrawals for an extra year or two is helpful, I think the simplification of the age requirement is the most beneficial part of this change. It’s easier to figure out when you turn 72 than it is to calculate a half birthday.
If you are over age 70.5, you are no longer prevented from contributing to a traditional IRA. You must still qualify, which means you or your spouse must have earned income during the tax year. This change will help taxpayers that are still working late in life save on taxes and save for retirement more easily.
Beneficiaries of retirement accounts can no longer “stretch” distributions out over their lifetime. The beneficiary must empty the account by the end of the 10th year following the original account owner’s death, if they died after December 31, 2019. This could quickly create some tax problems, especially for large retirement accounts. These distributions are taxed as regular income and could push you into a higher tax bracket. Imagine inheriting an IRA worth $1,000,000 and having to withdraw over $100,000 per year. We prioritize proper estate planning with our clients while the original account owner is alive to minimize taxes. There are also a number of tax strategies that can be implemented to reduce the tax burden once inherited. Early and accurate planning can save thousands of dollars.
529 college savings account uses have been expanded for certain Apprenticeship Programs and for repayment of up to $10,000 of student loans. Coordinate paying for college in the most efficient way by including gifts, tax credits, and 529s. For 529s specifically there are planning opportunities to maximize financial aid, depending on whether the account is owned by the parent or grandparent of the student.
New parents, through birth or adoption, will be eligible to withdraw $5,000 penalty-free to offset the cost of delivery or adoption. Of course taxes must still be paid, but the 10% early withdrawal penalty from retirement accounts is waived for 12 months after the birth or adoption of a child. This change will help many families when they need assistance most. But don’t forget that $5,000 could have grown substantially in the account over 30 years or more. For that reason, you may pay back the $5,000 in the future if you desire.
The SECURE Act also expands tax credits for small businesses that would like to providing a retirement plan for themselves and their employees. These include 401(k)s as well as SEP IRAs and SIMPLE IRAs, among others. We have helped dozens of small businesses establish retirement plans. If you own or work for a small business, we would be happy to consult with you to help you decide which type of plan works best considering your goals and budget.