In December 2019, Congress passed a law that made significant changes to how retirement accounts are taxed during the account owner’s life and how the account is taxed after it is inherited by the account owner’s beneficiaries. The SECURE Act has both positive and negative consequences. Please read the following information as this could impact your retirement and estate plan.
SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019, and it addresses a wide variety of retirement planning topics.
If you have or are in the process of planning your retirement, here is what the Secure Act means for you:
Required Minimum Distributions (RMDs) will begin at age 72
The bill has increased the RMD age from 70 ½ to 72 starting in 2020. This means if you are turning 70 ½ in 2020, you do not need to take a RMD. However, if you started RMDs prior to 2020, you will need to continue taking them.
From January 1st, 2020, you will be required to start withdrawing funds from your defined-contribution accounts such as 401(k), and traditional IRAs at age 72.
People who turned 70 ½ in 2019 (born prior to July 1st, 1949), will still need to take RMD for 2019 by April 1st, 2020. If you are presently eligible for RMDs because you are over the age of 70 ½, you must keep receiving these RMDs.
People who will turn 70 ½ in 2020 or later may wait until they reach the age of 72 to start taking RMDs.
Elimination of the “stretch” IRA option
According to the Secure Act, in case of certain non-spouse beneficiaries, an inherited Individual Retirement Account (IRA) will need to be allocated by the end of the 10th calendar year after the individual’s death.
All inherited IRAs with a death date of 2019 or prior still maintain the ability to stretch the distribution over the lifetime of the beneficiary (even if the account is created in 2020).
The earlier rules that permitted a non-spouse IRA beneficiary to “stretch” RMDs from an inherited account over their own lifespan have been removed. This rule also applies to inherited funds in an employer tax deferred accounts (like 401k) or contribution plan.
There are exceptions for individuals not more than 10 years younger than the account owner, disabled individuals, and spouses.
If you have already inherited a stretched IRA, this change will not affect you. It only applies to beneficiaries of an individual who dies after December 31st, 2019.
Revocation of the maximum age for traditional IRA contributions
The new act will allow you to contribute to your traditional IRA even after turning 70 ½ as long as you continue to work. This change will begin for tax year 2020 contributions and does not apply for tax year 2019.
Expansion of section 529 plans (qualified tuition plans)
Parents can now use their 529 funds to pay down student loan debt of up to $10,000.
If you have money remaining in your college savings plans after your child graduates, you can use it to pay down the student debt over the course of that student’s lifetime. This plan can also be used to pay for some apprenticeship programs.
Tax credits of up to $5,000 for small business owners
According to the Secure Act, the maximum credit for businesses has increased from $500 to $5,000. If you are a small business owner, you can receive this tax credit for starting a retirement plan.
This new change offers a start-up retirement plan credit for small-level employers of $250 for every non-highly compensated employee who is eligible to participate in a workplace retirement plan. This tax credit would apply to small business owners with up to 100 employees over a three-year period starting after December 31st, 2019.
It also applies to SIMPLE IRA, SEP, 401(k), and profit-sharing plans. If your retirement plan includes automatic enrollment, you now have access to additional credit of up to $500.
Other changes related to the Secure Act
There are some other changes that could affect your retirement savings plans. The new bill:
- Allows lifetime income investment to be allocated from your workplace retirement plan. The retirement income options are now portable as well. So, if you join another company, you could roll over the previous lifetime income investment to the new IRA or 401(k).
- Encourages retirement savings by raising the maximum limit for automatic-enrollment contributions in employer-based retirement plans from 10% (of salary/wages) to 15%. This means the amount withheld for your retirement savings could increase every year until you are contributing 15% of your income to the retirement savings account.
As an Elder Care Law Firm, we work diligently to ensure our community is aware of when important changes in the law occur so those affected can carefully consider the potential impact. Please share this information with family and friends.
Many details to this new bill are being analyzed for new planning strategies. As such, we will keep you posted as more information becomes available. For now, please review your retirement plan beneficiary designations to ensure they are in line with your wishes and in keeping with this new legislation.
If you would like to review your current estate plan with us so that we can help you make changes if necessary, please contact our Intake Specialist, Emma Parrott at 865-313-2033. She will be happy to assist you with scheduling a consultation with one of our attorneys. There is no charge for current clients to have your estate plans reviewed.
