At the end of December Congress passed into law the SECURE Act, the implications have a significant impact on retirement. As your financial advisors, we are keeping abreast of the new legislation and doing lots of research so we can assist you with taking advantage of the changes. There will be many new strategies for optimizing retirement savings and distributions. Here are a few of the changes that might affect you:
END OF STRETCH PROVISIONS
Up until now when an IRA or other retirement account was inherited the beneficiary was able to stretch out the required minimum distributions over his or her lifetime. With the new law a spouse is still granted this stretch option but for almost everyone else the account must be depleted within 10 years. (There are exceptions for disabled individuals, individuals not more than 10 years younger than the account owner, as well as minor children until they reach the age of majority.) The law applies to anyone who passes away in 2020 and beyond. This can have significant tax implications for those inheriting accounts with large balances. There is flexibility with the amount that is withdrawn within the 10 year period so it will be important to work with your accountant and financial advisor to strategize the timing of the withdrawals. On the front end, some folks may find it advantageous from a tax perspective to perform Roth conversions to make their retirement accounts more tax friendly for their beneficiaries.
NEW AGE FOR REQUIRED MINIMUM DISTRIBUTIONS
As people work longer and life expectancies increase it makes sense that the age to begin RMDs increases too. Beginning in 2020, you don’t need to start taking RMDs until the year in which you turn 72, and you have until April 1st of the following year to take that first RMD (all subsequent distributions need to be taken by year end). If you turned 70 ½ in 2019 or before, you will still follow the old rule of beginning RMDs the year you turn 70 ½.
Another change to an age rule is now you are able to continue contributing to an IRA if you are working past the age of 70 ½. This is a positive change for those still working and also makes sense considering contributions were already permitted to Roth IRAs, 401(k)s, etc. This change also opens up a new strategy of Roth conversions later in life.
OTHER ITEMS IN THE BILL
Medical: For 2019 and 2020 unreimbursed medical expenses can be deducted if they exceed 7.5% of adjusted gross income. In 2021 it will go back to 10% of AGI.
College: Now 529 education accounts can be used to pay student loan balances up to $10,000 without penalty. There may be the possibility of a state tax deduction for this as well if states follow the federal definition, but others may pass supplemental laws and say the money is only for paying for college directly and not student loans. Of course the Federal Government doesn’t allow double dipping so taking money from a 529 to pay a loan eliminates the deduction for student loan interest – again it’s all about strategizing.
Early Withdrawals: Taking money from a qualified plan or IRA before 59 ½ typically means you’ll pay a penalty unless the withdrawal falls within a narrow set of exceptions. One exception was added to the list, now new parents can take up to a $5,000 withdrawal for the birth or adoption of a child. Of course we recommend thinking long and hard before taking funds prematurely from a retirement account. Early withdrawals should truly be for emergency only.
At Work: The law now includes a requirement for part time workers to be covered in qualified retirement plans. Employers are also now required to provide an annual statement projecting how much income can be expected from a current retirement account balance. It will also be easier for employers to offer lifetime income annuities through retirement plans – but employees should consult with a financial advisor before making this kind of decision.
Do you have questions about the new legislation and how it might affect you? We’re always here to help, all you have to do is reach out!