As many might have missed in the last few weeks of 2019, Congress and the White House avoided a government shutdown by passing some substantial spending bills. Part of that package included the SECURE Act or “Setting Every Community Up for Retirement Enhancement”, a fairly sweeping piece of legislation passed by the House earlier last summer, but then languished in the Senate until some members pushed for its inclusion in this final spending bill. SECURE centers around retirement savings and other tax provisions that will have significant impact on many for years to come.
If the question is simply whether the SECURE Act impact you, the likely answer is yes. The more nuanced question is how and what to do about it. For those readers of our blog who are clients of TAAG, we’ll be sure to cover any specific impact to you or your plan in an upcoming 2020 review meeting.
Let’s review the most significant changes made by the Act.
Changes to IRAs (Individual Retirement Accounts)
Required Minimum Distribution
In the past, all owners of IRAs were required to withdrawal a certain amount from their IRA accounts in the year they reached age 70½ and every year thereafter. This is commonly known as a required minimum distribution (RMD). The amount required to be distributed is determined by a factor related to the account owner’s age and life expectancy which increases slightly each year.
Effective January 1, 2020, this requirement now doesn’t kick in until age 72, but only for those who have yet to reach age 70½ as of December 31, 2019. In other words, for those already subject to RMD, there are no changes to you and you’ll still be required to take your distribution each year going forward. But, if you turned 70 on or after July 1, 2019, you will not be required to take your RMD until the year in which you reach age 72.
There is not a lot of strategy to planning around this change, though it will help delay some taxable income for those not interested in drawing from their retirement accounts until as late as possible.
In one of the more significant changes, IRAs inherited by anyone other than a spouse (and a handful of other exceptions) will no longer have the required minimum distribution “stretched” over their lifetimes. Instead, inheritors, including adult children, will be required to distribute the entire account within ten years. For estates currently in flux, this new rule applies only to those who pass away in 2020 and forward.
This has some potentially significant tax implications in forcing an inheritor to add to their taxable income in relatively short order, but also creates an opportunity for some strategy in that period of time. While the entire IRA has to be distributed in ten years, there is no requirement for an annual distribution. In other words, if an inheritor knows they’ll be selling a business, retiring, or experiencing some other significant taxable event or change to taxable income in that ten-year window, they could strategically hold off on taking anything from the inherited IRA until after that time.
Contributions Past Age 70½
This change ends the prior rule disallowing contributions to an IRA after age 70½. Now, anyone with earned income from wages or self-employment can contribute up to the legal maximum to their IRA regardless of age.
While this may not impact many today, as the whole concept of retirement continues to shift, an increasing number of septuagenarians are likely to continue to have earned income of one kind or another. Having an opportunity to squirrel away some additional tax-deferred savings will be a welcome opportunity to more and more people down the road.
There is a provision in the new bill to allow for up to $10,000 from a 529 plan to be used to pay off student loans. This is a lifetime, per-person maximum, but could come in handy for any number of scenarios.
The bill also expands the definition of the programs it will cover to include apprenticeship programs that are registered with the Department of Labor. As labor shortages in trades continue and jobs in those fields are in extremely high demand, this will hopefully attract additional young people to consider programs outside the traditional college experience without thwarting efforts parents or other loved ones have made in saving for their post-secondary education.
Birth/Adoption Expenses – Exception that allows for up to $5,000 to be distributed penalty-free from an IRA or qualified plan to go towards qualified birth or adoption expenses.
Part-Time Workers Eligible for 401(k) – New rules around allowing certain part-time employees to participate in employer-provided retirement plans.
Kiddie Tax – The Tax Cuts & Jobs Act of 2017 included a rule that treated income earned by minor, dependent children at Trust tax rates, which are much more punitive than typical ordinary income rates for individuals. The SECURE Act reverses that decision and instead applies the parents’ rate to this income.
Medical Expenses – The adjusted gross income (AGI) hurdle for qualified medical expenses reverts to 7.5% of AGI as opposed to 10%.
Small Business Provisions – This allows for certain small businesses to pool together in offering retirement plans to employees to help lower costs and administrative headaches associated with offering such plans.
And Many More
There are many, many other changes made in the 1,773-page bill that could fill this blog for the remainder of the year. As mentioned earlier, we’ll be sure to review any changes with clients as we review your specific situation in the year ahead.