“It’s the most wonderful time of the year.”
Or so the song says. With so many deadlines revolving around the calendar year-end, like those for required minimum distributions (RMDs), it is also one of the busiest times of the year for advisors.
On top of that, every few years Congress seems to leave us with a nice holiday present in the form of some transformational legislation passed before the clock strikes midnight on December 31st. In 2017 it was the Tax Cuts and Jobs Act which was passed on December 22, 2017. This holiday season our “gift” came in the form of the SECURE Act (aka “Setting Every Community Up for Retirement Enhancement”), which was lumped into a spending bill and signed into law on December 20, 2019. Inevitably, this leads to a rush of questions and unknowns to sort out. But don’t worry, that’s our job!
Now that the in-laws have left and the last of the holiday leftovers have been emptied from the fridge (hopefully!), let’s review four impactful changes brought about by the SECURE Act of 2019, which went into effect January 1, 2020. Scan through these and if any are applicable to you or if you have any questions on these changes, please reach out to your advisor. We will also be proactively reaching out to clients who we know will need to make some adjustments. Let the fun begin!
1. The age of commencement for RMDs increased from 70½ to age 72.
- If you were born between 7/1/1949 and 12/31/1950, your RMDs will now commence in the year you turn 72, which is 2021 for some, 2022 for others.
- If you turned 70½ in 2019, you were still required to begin taking any RMDs in 2019 (if you didn’t, you still have until April 1, 2020).
What it means to you: If you are executing any Roth conversions or tactically realizing income at lower tax brackets prior to the onset of RMDs, this change provides an additional one- or two-year window to continue with your strategy.
2. Elimination of the “Stretch IRA” for most non-spousal beneficiaries.
Previously, non-spousal beneficiaries could distribute an inherited IRA or 401(k) or other qualified account over their own lifetime, effectively allowing them to “stretch” the tax advantages of the IRA. Now, any non-spouse beneficiary will be required to fully distribute the balance of the inherited account within 10 years after it was inherited. This change does NOT apply to beneficiaries who are:
- Disabled or chronically ill
- A child of the deceased who is not the age of majority (but once that child reaches the age of majority, the 10-year rule kicks in)
- An individual who is not more than 10 years younger than the deceased (For example, Mary is 75 and never married. Her beneficiaries are her three brothers ages 66, 68 and 72 – all not more than 10 years younger. Mary passes away in 2020. Her three brothers will all be able to withdraw their respective share over their life expectancy).
What it means to you: If you are the beneficiary of an IRA, 401(k) or other pre-tax qualified plan, the shortened distribution period means you will likely pay more in taxes because there will be less time to spread out the tax liability. While inherited Roth distributions will still be tax free to beneficiaries, the opportunity to “stretch” the tax-free growth over the beneficiary’s lifetime is eliminated.
If you are the owner of one of these accounts, careful planning with your advisor can help minimize the tax impact of the recent law changes on your inherited assets.
These changes also make it vitally important to review, and potentially update, any trusts that serve as beneficiaries for traditional and Roth IRAs. The SECURE act may cause previous estate planning documents that include trusts as beneficiaries to no longer accomplish their intended result.
3. Traditional IRA contributions no longer have the 70½ age limit.
This was likely changed since life expectancy has increased and individuals are living and working longer.
What it means to you: If there is earned income, you can make deductible IRA contributions as well as a spousal contribution. Thus, if you are still working and over the age of 70½ (DOB after 7/1/1949), then talk with your advisor about whether it is advantageous to continue IRA contributions and/or continue back-door Roth contributions.
4. 529 plans now include student loan repayment and support for homeschooling and apprenticeship programs.
Approved uses for 529 plan funds now include up to $10,000 of principal or interest for student loan repayment, which can also be used for siblings. Also, funds can be used to pay for fees, books, supplies and equipment for homeschooling and apprenticeship programs as long as the program is certified with the Secretary of Labor.
What it means to you: If you have a 529 plan and have an existing loan and/or are homeschooling, talk with your advisor about what additional expenses can be covered. Or, if you don’t currently have a 529 plan but live in a state that provides tax benefits for 529 plan contributions, a 529 plan can be used as a conduit to make student loan payments to take advantage of the deduction on state income taxes.
We know that this is overwhelming so don’t worry – we are here to help! There are also a lot of other changes bundled within, such as tax relief after a disaster and penalty-free retirement plan withdraws for a childbirth or adoption, so the takeaway here is to stay in close contact with your advisor, and always contact him/her ahead of a life event, who can then help you determine the necessary steps to take.
Your Parsec team who has been poring through these documents since the holidays!