The SECURE Act is here. What are the big changes?
December 30, 2019 | By Kevin Smith
President Trump signed the SECURE Act into law on December 20th, 2019. The purpose is to help more Americans obtain retirement security.
The following is not an exhaustive list of changes, but a description of changes that will likely impact the most people.
IRA required minimum withdrawal age pushed to 72
The money in Traditional IRAs has not been taxed yet, so any withdrawals from IRAs are taxed at ordinary income tax rates. The IRS had a rule mandating IRA withdrawals beginning at age 70 1/2 to ensure the federal government eventually receives tax revenue on those dollars. The annual required withdrawal starts at 3.7% of the account balance and increases each year.
Under the new rules, the beginning age for required minimum IRA withdrawals increases from age 70 1/2 to age 72 starting in 2020. Anybody already past age 70 1/2 must continue taking their scheduled required withdrawals.
IRA contributions allowed after age 70 1/2
IRA contributions were previously disallowed after age 70 1/2. This change removes that restriction, so people working past age 70 1/2 will be allowed to make pre-tax IRA contributions beginning in 2020. This change recognizing the increasing population of people who continue working in their 70s and beyond.
New rules for inheriting non-spousal IRAs
This change is specific to inheriting an IRA from a non-spouse, in which case the IRS requires the beneficiary to withdrawal funds from the IRA and pay income taxes on those amounts.
Before this change, the beneficiary could ‘stretch’ required withdrawals over their expected lifetime, which could help reduce income taxes over time. That provision has been eliminated for beneficiaries in 2020 and beyond. The new rule is the beneficiary must take distributions within 10 years of inheritance. There are no annual distribution requirements, so beneficiaries have flexibility to decide when to take the distribution and pay income tax. There are some exception, for example minor children, disabled and chronically ill beneficiaries will not be subject to this rule.
If you inherit an IRA from a non-spouse, it will be important to consider your income tax situation to determine when to take the taxable withdrawals over the 10 year period.
For those who inherited an IRA from a non-spouse prior to 2020, the old rules still apply.
Annuity options within 401(k) plans
The SECURE Act creates protections for employers to offer annuities in 401(k) plans as an investment option. We can expect to see more 401(k) plans offering annuities with the goal of providing lifetime income for retirees. This is great news for insurance companies, but annuities can be complicated to evaluate, considering fees, penalties, interest rates, and fine-print clauses. More financial education will be needed to help retirees understand their options.
Encouraging more small business 401(k) plans
The SECURE Act provides increased tax credits for companies that start 401(k) plans, and a further tax credit for companies adopting automatic enrollment of participants.
Another provision will make it more likely that Multiple Employer Plans (MEPs) will become more widely available, which could drive down the cost and improve the quality of 401(k) plans for small businesses.
529 college funds can be used to repay student loans
529 college savings accounts can be used to repay up to $10,000 of student loans, per person. This is a lifetime amount and will not be adjusted for inflation.
Posted in: Tax Planning
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