The Setting Every Community Up For Retirement Enhancement (SECURE) Act became effective Jan. 1, 2020, and it will affect nearly everyone in some way. Like any huge tax bill, there are things that some people will like and some people will hate. Here are some of the provisions that most people will want to know:
Some of the good news:
- Required Minimum Distribution (RMD) change. If didn’t turn 70 1/2 in 2019 or earlier, you don’t have to take your first RMD until you turn 72. Just like the RMD rules that have been in place for years, you could delay taking that first RMD until April 15th of the calendar year after you turn 72, but you’d also have to take a second RMD before December 31st of that same year.
- Contributions to Traditional IRA Change. Until now, you couldn’t make contributions to your Traditional IRA once you hit the calendar year in which you turned 70 1/2. The SECURE Act removed that age limit, and, as long as you have earned income, contributions can be made at any age.
- New Exception To The 10% Early Withdrawal Penalty. Up to $5,000 can be distributed penalty-free from an IRA or from a qualified plan as a “Qualified Birth or Adoption Distribution.” It has to taken within a year after the birth or adoption, and, as of now, it appears that it’s not a one-time-only deal and can be used following subsequent births or adoptions.
- New Qualified Education Expenses for 529 Plans. Under the SECURE Act, 529 plans can now be used to pay for expenses related to certain Apprenticeship Programs and a lifetime amount of $10,000 can be used to pay the principal and/or interest of qualified education loans. The $10,000 lifetime limit on student loan debt is a per-person limit, and in addition to using the funds in a 529 plan to pay for the 529 plan beneficiary’s debt, an additional $10,000 may be distributed as a qualified education loan repayment to satisfy outstanding student debt for each of a 529 plan beneficiary’s siblings. This change is effective retroactive to the beginning of 2019.
- Bigger Tax Credits for Small Employers who Establish Employee Retirement Plans. Employers with less than 100 employees who establish a small business-sponsored retirement plan, such as a 401(k), 403(b), SEP IRA or SIMPLE IRA may be eligible for a tax credit of of $500-$5000.
Some of the bad news:
- Elimination of the “Stretch IRA” Provisions for Most IRA Beneficiaries. This is a game-changer for many parents and children. Under current tax law, children who inherit an IRA from a parent could stretch out the required minimum distributions (RMDs) over their own life expectancies, thereby taking advantage of tax-deferred growth and spreading out the tax consequences. Now, under the SECURE Act, if you die in 2020 or later, your adult children beneficiaries will have no annual RMDs, but will be required to withdraw the entire amount in a lump sum in 10 years! Beneficiaries who are spouses, disabled per IRS regulations, or are less than 10 years younger than the IRA owner will still be able to stretch out their RMDs. But the trusts many people use to control IRA distributions to their children may now not work as they intended. The IRS has not addressed this specific issue yet.
This is just a rough outline of some of the provisions included in the law and don’t include a lot of the details. Contact your financial advisor if you have questions about how the SECURE Act may affect your retirement plan. If you named a trust or a sub-trust as a beneficiary of your IRA, contact your estate planning attorney to discuss your options.
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