With the passage of the spending bill to find the federal government, there was one of many additional bills attached to the two spending bills. One, in particular, will have a profound effect on just about everyone, and that is the Setting Every Community Up for Retirement Enhancement Act of 2019 or as it is known, the SECURE Act. In a rare move that had bipartisan support but was bogged down in the Senate for months before being attached to the spending bill. So, what does the SECURE Act mean for those who work or have retirement accounts? Let us examine some of the more pertinent details of the act and how they will affect us starting January 1, 2020.
IRA
One thing that the act changes are when someone is required to start making their Required Minimum Distributions or RMD’s. Now, if you are already age 70 ½ before January 1st, you need to continue making your RMD’s as scheduled. But if you turn age 70 ½ on or after January 1st, you can delay your RMD’s until age 72. This means that you can leave your savings in an extra 18 months to continue to earn and compound before making mandatory withdrawals. Along with this change in RMD age, the government has removed the age limitation on contributions as well from age 70 ½. Provided you have earned income after age 70 ½ you will be eligible to make contributions to a Traditional IRA, ROTH IRA’s did not have this stipulation and relied on the earned income guideline alone. These two changes are a great benefit to those who are older and still working full or part-time.
Another change to IRA’s that will have a direct impact on IRA’s that are left to someone other than a spouse or qualified individual is the removal of a “stretch IRA.” The use of these allowed someone to use an IRA as an estate planning tool as they did allow a beneficiary to stretch the RMD’s over their lifetime. This meant that someone could leave a large IRA to a young child and the IRA would continue to grow tax-deferred for possibly decades. If you left an IRA to someone before January 1st that arrangement can remain in place, for those who inherit an IRA after January 1st, they have a decade to withdrawal the funds from the account. The main reason behind this move is to generate tax revenue on the accounts and pay to the government sooner rather than later. But do not let this change deter you from estate planning as there are still ways in which you can use an IRA to leave large sums of money to family members without incurring taxes. To learn more about these methods, contact a Registered Financial Consultant.
For those of us who have IRAs and are younger the act allows for withdrawals of up to $5,000 for qualified birth or adoption fees. This provision does not eliminate the taxes owed on the withdrawal but does eliminate the 10% early withdrawal penalty. This provision of the law while having good intentions, maybe a wolf in sheep’s clothing. What I mean by this is withdrawing money while you are still young from a retirement account may be a good short-term solution it will cost you much more than the mere $5,000 in early withdrawals as that money would have grown tax-free for possibly decades meaning you lose out on thousands of dollars in potential gains.
529 Plans
For those who have or used state-sponsored, 529 Education Savings Plans, there is some good news for those with student loans. Under the new act, up to $10,000 may be applied to student loans on an annual basis. This is a definite advantage for families that end up with funds in an account and no further children that have current education expenses. While the beneficiary of these plans can be changed to other family members, this allows for some creative uses if properly planned in advance. I will need to read the entire act but like IRA and the stretch issue I can see some advantages to this provision so you may wish to seek the assistance of a Registered Financial Consultant as well on 529 plans.
401(k)
Now, as for workplace retirement accounts, there are two significant changes there as well. First, the government has removed a good deal of the liability associated with your employer using annuities in 401(k) plans. Before this act did this, many employers were hesitant to place these financial instruments in the plans due to the legal liability associated with the failure of an insurance company. However, as annuities are extremely complex in nature and can often be extremely expensive to own, I am hoping that employers that offer them in their plans keep them as simple as possible for the sake of employees.
The second aspect of 401(k) plans that has changed is the ease in which part-time employees can contribute. With the part-time act workers who have worked 1,000 in a year or have three years with at least 500 hours in each year are eligible to contribute to the plan. And with the addition of allowing part-time workers to contribute, the government removed the limitations on small businesses to pool resources with similar businesses to allowing them to pool with any small business to reduce 401(k) administration costs.
As I learn more about the SECURE Act, I will pass along any relevant or important information to you. But in the meantime, if you have any specific questions, feel free to contact me directly, or seek out the assistance of any fee-only Registered Financial Consultant.
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