The final weeks of 2019 brought more legislative tax and retirement reform. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill was originally passed in the House over the summer and laid dormant for months until it made its way through the Senate in December. This new law is not nearly as extensive as the Tax Cuts and Job Act of 2017, yet the impact will be felt by individuals and their financial plans for decades to come.
Like many laws, there is plenty to like and dislike about the SECURE Act. Many of the changes were administrative in nature; however, I want to highlight three aspects of how the SECURE Act may impact your planning.
Elimination of the “Stretch IRA”
Currently, individuals who inherit an Individual Retirement Account (IRA) or employer-sponsored 401(k) can often stretch required withdrawals over their life expectancy. Since withdrawals are taxable, the associated income tax payments can also be stretched out
The new law will eliminate the “Stretch IRA,” which will require a beneficiary to withdrawal the funds and pay the associated income taxes within 10 years. If you already own an Inherited IRA, the legislation will only apply to account owners who die after December 31, 2019.
There are exceptions, including surviving spouses, who can still stretch out withdrawals and the associated income tax payments over their life expectancy.
Push Back RMD Age
Legislation has increased the age of Required Minimum Distribution (RMD) from 70 ½ to 72. If you have attained RMD age, the new legislation will not impact when you are required to commence withdrawals. You must continue to withdraw the minimum required amount each year from your IRA account.
If you turned 70 ½ in 2019, you will not be able to take advantage of the law’s increased age. Only those born on or after July 1, 1949, can wait until they reach age 72.
In addition to IRAs, the laws increased age also pertains to employer-sponsored tax deferred retirement plans such as 401(k)s, 403(b)s, and 457s.
529 Plan to Pay Student Loans
529 Plans are tax-advantaged accounts designed to encourage families to save for college and private K-12 education. (For more on information on how 529s work, click here) Yet a common concern by parents is overfunding an account. New legislation may help alleviate some of this concern.
529 plan account owners can now withdraw up $10,000 tax free for payments towards qualified education loans. The $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. For example, a parent with two children may take a $10,000 distribution to pay student loans for each child, for a total of $20,000.
The SECURE Act brought about many changes to IRAs, 401(k) s and other tax provisions. The changes are quite nuanced and will likely impact your personal financial planning situation. In the year ahead it will be important to review your situation and collaborate with your financial advisor to best position yourself with regard to the new laws.