You’ve likely heard of it, but do you know how the SECURE Act might affect you?

January 7, 2020 | Stacy Miller, CFP®, Bright Investments

 

On December 20, 2019 the SECURE Act (Setting Every Community Up for Retirement Enhancement) became law. It has some great retirement benefits, but it’s got some great non-retirement changes too. One of my favorites is an update to the 529 Plan. All the changes affect tax year 2020, but some are retro-active to 2019 and even 2018!

This is a high-level overview of some of the important updates. Please review the actual law through the link above or discuss specifics with your financial advisor or tax professional. As always, there are several ifs, ands, and buts within each topic that may be relevant for you.

Brief Recap of Retirement (IRAs) Changes

  • As our society continues to live longer active lives, it made sense to adjust the Required Minimum Distribution (RMD) age from 70.5 to 72. This means that you’re no longer required to take distributions from your IRA until April, the year following your 72nd Your investments can continue to grow for 18 additional months. Don’t get confused with when you are eligible to withdraw from your IRA. That age remains 59.5.
    • The RMD age change did not affect your ability to make Qualified Charitable Contributions (QCD’s) beginning at age 70.5.
  • As long as you’re earning income (the first requirement for contributing to an IRA), the restriction on limiting contributions after age 70.5 has been lifted. So, if you’re still working at age 72+, you could potentially contribute to your IRA at the same time you’re required to take a distribution.
  • You can now take a penalty-free (not tax-free) $5,000 (maximum) distribution for a qualified birth or adoption. And if you’re married and you both have IRAs, you can both take a distribution.
  • If you own a small business and have been considering a SEP or SIMPLE IRA retirement plan because they’re easy and relatively inexpensive to administer, there’s an increased tax credit for establishing it now, and you have until your business’s tax due date to open one that’s retroactive to 2019.
  • The not-so-good news part of the Act is that non-spouse beneficiaries of IRAs can no longer take distributions over their life, spreading out the tax consequences over many years. Now, it has to be distributed over 10-years. There is some flexibility in how it’s distributed, as long as it’s completely distributed by the end of the 10th year after death.

Brief Recap of Non-Retirement Changes

  • As I noted above, maybe my favorite update is that 529 plans can now be used for apprenticeships and up to $10,000 in student loan repayments. 529 plans became more flexible after the Tax Cuts & Jobs Act (TCJA) and continue to be a great investment for a variety of reasons with these new updates. Three important points regarding student loan repayments that are worth mentioning:
    • It’s a lifetime limit of $10,000, not an annual limit.
    • It can be retroactive to 2019.
    • It can be used for siblings’ (of the designated beneficiary) student loan repayments as well.
  • The SECURE Act repeals the TCJA changes to the kiddie tax. Before TCJA, if your minor child had unearned income, they were taxed at the parents’ top marginal tax bracket. After the TCJA, they were taxed at the trust tax rates, but now it reverts back to the parents’ top marginal tax bracket for 2019 & 2020. If this previous TCJA change negatively affected you, you can amend your 2018 return, but it’s automatic for 2019.

There is much more to the SECURE Act, but I hope this brief summary was helpful. If any of these topics are relevant to you, I would encourage you to read more about it or discuss your personal situation with your financial advisor or tax professional.

 

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